UC-NRLF 


SB    fl7    605 


of  lE 


LIBRARY 

OF  THE 

UNIVERSITY  OF  CALIFORNIA. 

Class 


OUTLINES  OF  ECONOMICS 


A  SYLLABUS  FOR  INTRODUCTORY  STUDY 


by 
HERBERT  ELMER  MILLS,  Ph.  D. 


Second  Edition 


POUGHKEEPSIE,  N.  Y. 
1909 


Copyright,  /pop, 
HERBERT  KILMER 


ENTERPRISE    PRINT,    POUGHKEBPSIE,    N.  Y. 


Within  the  last  few  years  several  excellent  text-books  in 
Economics  have  appeared,  each  of  which  has  its  own  points 
of  superiority.  These  Outlines  were  prepared  in  1906  with 
the  intent  of  guiding  the  student  in  using  these  several  books 
and  of  making  available  in  unified,  systematic  form  the 
particular  excellencies  of  the  different  books.  They  are  in 
no  sense  a  substitute  for  text-books.  Each  student  must 
have  for  constant  use  Marshall's  Economics  of  Industry, 
Seager's  Introduction  to  Economics,  or  his  Economics,  Briefer 
Course,  and  Seligman's  Principles  of  Economics.  Other  very 
desirable  books  are  Bullock's  Introduction  to  the  Study  of 
Economics,  Fetter's  Principles  of  Economics,  Gide's  Princi- 
ples of  Political  Economy  (2nd  Amer.  ed.),  and  Mill's  Prin- 
ciples of  Political  Economy. 

In  the  present  revision  many  changes  of  wording  have 
been  made;  the  treatment  of  American  Monetary  History 
has  been  much  condensed;  and  the  references  have  been 
adapted  to  the  newer  editions  of  the  works  cited.  At 
the  appropriate  places  "Required  Readings"  in  Bullock's 
Selected  Readings  in  Economics  have  been  introduced  and 
nearly  the  whole  of  that  collection  is  so  included.  I  am  in- 
debted to  Miss  Emilie  Louise  Wells,  Instructor  in  Econo- 
mics, Vassar  College,  for  valuable  suggestions  and  much 
laborious  verification  of  references. 

Lectures  to  the  class  will  follow  these  Outlines.  At  the 
meetings  in  sections  each  student  will  be  held  responsible  for 
fuller  treatment  of  points  indicated  in  the  Outlines;  for  argu- 
mentative discussion  of  debatable  questions;  and  for  constant 
illustration  based  on  reading  and  personal  observation.  It  is 
hoped  that  note  taking  during  the  lecture  hour  will  be  found 
unnecessary.  Grasp  of  the  thought,  reflection  and  application 
are  more  desirable  than  voluminous  but  unassimilated  notes. 


Department  of  Economics, 

VASSAR  COLLEGE, 

September,  1906. 


226776 


Outlines  of  Economics. 


CHAPTER  I. 
INTRODUCTORY. 

I.    Definition,  Scope  and  Scientific  Character  of  Economics. 

a.  Definitions  used  at  different  periods  of  economic  study 
reveal  the  change  in  its  character. 

Adam  Smith,  1776:  Inquiry  into  the  Nature  and  Causes 
of  the  Wealth  of  Nations. 

Nassau  Wm.  Senior,  1836:  "The  science  which  treats  of 
the  nature,  the  production  and  the  distribution  of  wealth." 

John  Stuart  Mill,  1848:  "Writers  on  Political  Economy 
profess  to  teach,  or  to  investigate,  the  nature  of  Wealth,  and 
the  laws  of  its  production  and  distribution." 

Wilhelm  Roscher,  1854:  "The  starting  point  as  well  as 
the  object  point  of  our  science  is  Man." 

Luigi  Cossa,  1877:  "The  science  of  the  social  ordering 
of  wealth." 

Henry  C.  Adams,  1886:  ' 'Political  Economy  treats  of 
industrial  society." 

J.  N.  Keynes,  1890:  "The  science  which  treats  of  the 
phenomena  arising  out  of  the  economic  activities  of  mankind 
in  society."  ''Economic  activity  may  be  defined  as  human 


6  Introductory. 

activity  which  directs  itself  towards  the  production  and  ap- 
propriation of  such  means  of  satisfying  human  needs  as  are 
capable  of  being  made  the  subject  of  exchange." 

R.  T.  Ely,  1908:  "The  science  which  treats  of  those 
social  phenomena  that  are  due  to  the  wealth-giving  and 
wealth-using  activities  of  man." 

H.  R.  Seager,  1908:      "The  social  science  of  business." 

Cossa,  Introduction  to  Political  Economy,  pp.  58-65;  Kly,  Out- 
,     lines  of  Economics,  (1908)  pp.  1-7;  Keynes,  Scope  and  Method  of 
Political   Economy,    ch.  3;    Seligman,    Principles,   §  3;    Fetter, 
Principles,  pp.  3-5. 

b.  "  'Money,'  or  'general  purchasing  power'  or  'command 
over  wealth'    is  the  center  around  which  economic  science 
clusters;  this  is  so,  not  because  money  or  material  wealth  is 
regarded  as  the  main  aim  of  human  effort,  nor  even  as  afford- 
ing the  main  subject  matter  for  the  economist,  but  because 
in  this  world  of  ours  it  is  the  one  convenient  means  of  measur- 
ing human  motive  on  a  large  scale." 

Marshall,  Principles  of  Economics,  (5th  ed.)  Bk.  I.,  ch.  2;  Mar- 
shall, Economics  of  Industry,  Bk.  I.,  ch.  3. 

c.  Not  all  subjects  of  study  are  sciences.     The  character- 
istics of  the  sciences  are  ability  to  classify  facts  or  phenomena 
in  orderly  arrangement;  and  to  establish  relations  of  sequence 
or  cause  among  them.     From  these  follows  some  possibility 
of  prediction.     Sciences  have    these   characteristics  in  very 
different  degrees. 

In  spite  of  the  apparent  freedom  of  the  individual  will, 
human  actions  are  capable  of  scientific  study,  and,  when 
masses  are  considered,  of  comparatively  accurate  prediction. 
The  social  sciences  are  incomplete  and  in  many  respects  very 
inexact ;  but,  because  it  possesses  a  more  accurate  measure  of 
the  relative  strength  of  human  motives,  Economics  is  more 
exact  than  the  others. 


Introductory.  7 

Economics  aims  to  discover  truth  and  must  be  distinguished 
as  a  science  from  statesmanship,  philanthropy,  social  reform, 
which,  as  arts,  endeavor,  on  the  basis  of  the  truth  discovered 
by  Economics  and  other  sciences,  to  accomplish  results. 

Marshall,  Principles,  (5th  ed.),  Bk.  I.,  ch.  3,  passim;  Mar- 
shall, Economic*  of  Industry,  Bk.  I.,  ch.  4;  Gide,  Principle*  of 
Political  Economy,  2d  ed.,  pp.  1-7;  Cossa,  Introduction,  pp.  40- 
57;  Davenport,  Outlines  of  Economic  Theory,  pp.  1-7;  Fetter, 
Principles  of  Economics,  ch.  1,  §  3;  Keynes,  Scope  and  Method, 
chs.  1-3;  Walker,  Political  Economy ,  3rded.,  pp.  17-23;  Seligman, 
Principles,  §  14;  Cairnes,  Political  Economy:  its  Character 
and  Logical  Method,  pp.  25-42. 

2.    Economic  Law  and  Method. 

Economic  laws  are  statements  "that  certain  action  may  be 
expected  under  certain  conditions  from  the  members  of  a 
social  group' '  in  lines  '  'of  conduct  in  which  the  strength  of 
the  motives  chiefly  concerned  can  be  measured  by  a  money 
price." 

In  Economics  as  in  other  sciences  the  adjective  normal  is 
used  to  describe  that  which  is  in  accord  with  scientific  law. 

Like  most  other  sciences  Economics  uses  both  induction 
and  deduction  in  discovering  its  laws. 


son,  Principles  of  jrotottcal  economy,  Vol.  1.,  pp.  l»-ZU;  beager, 
Introduction  to  Economics,  §§  31,  32;  Seager,  Economics,  §§  9,  10; 
Hadley,  Economics,  pp.  23-25;  Cairnes,  Political  Economy:  Its 
Character  and  Logical  Method,  L/ecture  III. 

3.    Relation  of  Economics  to  other  Subjects  of  Study. 

Economics  and  the  other  social  sciences  are  closely  related 
and  mutually  dependent.  Even  when  we  endeavor  to  decide 
the  appropriate  course  of  social  action  in  lines  in  which  the 
motives  are  mainly  economic  and  in  which  accordingly 
economic  laws  will  be  our  chief  guide,  we  get  assistance 
from  History,  Psychology,  Sociology,  Law,  Politics,  Statis- 


8  Introductory. 

tics,  Finance  and  other  studies  which  deal  with  man  individ- 
ally  or  socially.  But  Economics  having  its  own  special  field 
of  investigation  should  be  discriminated  from  all  these  other 
subjects. 

Cossa,  Introduction,  pp.  23-39;  Seligman,  Principles,  §§  12,  13; 
Seager,  Introduction,  pp.  1,  2;  Seager,  Economics,  §  2;  Keynes, 
Scope  and  Method,  chs.  4,  9,  10;  Ely,  Outlines,  (1908)  pp.  11-14; 
Marshall,  Principles,  (5th  ed.)  Appendix  C.";  Fetter,  Prin- 
ciples, ch.  1,  §  2;  Dictionaries  and  Encyclopaedias  for  definition  and 
scope  of  the  various  social  sciences. 


4.    Importance  of  the  Economic  Factor  in   Social   Development. 
"Economic  Interpretation  of  History." 

It  is  asserted  by  some  that  since  "the  existence  of  man 
depends  upon  his  ability  to  sustain  himself,  the  economic  life 
is  therefore  the  fundamental  condition  of  all  life. ' '  Marx  says: 
"The  economic  structure  of  society  is  the  real  basis  on  which 
the  juridical  and  political  superstructure  is  raised  and  to  which 
definite  forms  of  social  thought  correspond;  in  short,  the 
mode  of  production  determines  the  character  of  the  social, 
political  and  intellectual  life  generally."  This  "economic 
interpretation  of  history  does  not  exhaust  the  possibilities  of 
life  and  progress;  it  does  not  explain  all  the  nicities  of  human 
development;  but  it  emphasizes  the  forces  which  have  hitherto 
been  so  largely  instrumental  in  the  rise  and  fall,  in  the  pros- 
perity and  decadence,  in  the  glory  and  failure,  in  the  weal 
and  woe  of  nations  and  peoples.  It  is  a  relative  rather  than 
an  absolute  explanation." — Seligman. 

Seligman,  Economic  Interpretation  of  History;  Ghent,  Mass 
and  Class,  ch.  1;  Marshall,  Principles,  pp.  1-4;  Marshall,  Econo- 
mics of  Industry,  pp.  1-4;  Spargo,  Socialism,  ch.  4. 

5.    Value  of  the  Study  of  Economics. 

The  study  of  Economics  gives  better  understanding  of  his- 
tory, deeper  insight  into  our  present  social  organization, 
guiding  principles  in  connection  with  nearly  all  social  activ1- 


Introductory.  9 

ties,  deeper  sympathy  and  interest  in  connection  with  some 
profound  social  and  ethical  problems,  intelligence  and  discre- 
tion with  which  to  temper  our  feelings  in  the  presence  of 
social  evils.  It  also  provides  a  mental  discipline  surpassed 
by  few  if  any  studies,  since  it  encourages  precision,  accuracy, 
discrimination,  clearness  of  thought  and  expression.  Many 
of  its  problems  are  of  such  difficulty  that  they  require  most 
intense  application.  A  continued  chain  of  reasoning  is 
frequently  necessary  as  in  a  mathematical  demonstration;  but 
since  the  forces  and  factors  that  must  be  borne  in  mind  are 
very  numerous,  comprehension  and  grasp  in  an  unusual  de- 
gree are  necessary.  It  gives  a  training  in  that  kind  of  think- 
ing which  is  necessary  for  success  in  every  day  life  and 
action. 

Andrews,  Institutes  of  Economics,  §  16;  L/aughlin,  Study  of 
Political  Economy,  chs.  2,  3;  Cossa,  Introduction,  pp.  93-110; 
Patten,  American  Economic  Association  Publications,  5:  473- 
486.  Marshall,  Principles,  (5th  ed.)  Bk.  I.,  ch.  IV.,  §§  5,  6; 
Marshall,  Plea  for  the  Creation  of  a  Curriculum  in  Economics. 


CHAPTER  II. 
FUNDAMENTAL  CONCEPTS. 

I.    Definitions  Relating  to  Value. 

Utility  is  capacity  to  satisfy  a  want.  Value  is  power  in 
exchange  or  an  estimate  of  relative  utility.  Price  is  value 
expressed  in  money.  Demand  means  the  quantity  that  will 
be  taken  at  a  given  price.  Supply  means  the  quantity  that 
will  be  furnished  at  a  given  price. 

Seager,  Introduction,  §  26;  Seager,  Economics,  §  5;  Bullock, 
Introduction,  §§  107,  111,  112. 

2.    Wealth. 

a.  In  defining  wealth  we  hold  to  common  usage  and  dis- 
criminate between  wealth  and  welfare  even  though  etymologi- 
cally  and  ethically  such  distinction  be  unfortunate.     Wealth 
(as  used  in  Economics)  does  not  necessarially  mean  abundance. 
Those  goods  having  utility,   which   are  external  to  the  in- 
dividual, and  limited  in  amount  constitute  wealth.     Wealth 
is  that  which  has  value.      Wealth  may  be  private  or  public 
{=  social  or  collective).     Some  valuable  sources  or  condi- 
tions of  wealth  are  not  wealth.     Although  from  a  logical  and 
psychological  standpoint  there  is  no  difference  between  the 
utility  of  a  service  and  the  utility  of  material  wealth,  services 
are  not  included  in  wealth. 

b.  There  has  been  constant  change  in  the  forms  of  wealth 
with  development  of  human  desires.     The  forms  of  wealth 
at  any  time  and  in  any  country  are  determined  by  and  reflect 
the  prevailing  civilization.     A  large  amount   of  wealth    at 
present  consists  of  very  durable  but  very  indirect  means  of 
satisfying  wants. 


Fundamental  Concepts.  n 

c.  Since  man's  power  to  devote  himself  to  higher  aims 
and  activities  depends  upon  possession  of  wealth  sufficient  to 
satisfy  fundamental  needs  and  is  often  conditioned  upon  pos- 
session of  other  contributory  wealth,  wealth  is  essential  to 
individual  and  social  progress;  and  the  study  of  Economics 
is  a  study  of  that  which  conditions  science,  art  and  all  higher 
life.  Wealth  does  not  necessarially  advance  welfare  or  civili- 
zation. It  is  the  nature  of  man,  his  tastes  and  interests 
which  determine  what  things  are  wealth;  but  these  in  turn 
are  affected  by  his  choice  and  use  of  wealth. 

Seligman,  Principles,  §§  4,  5;  Marshall,  Principles,  Bk.  II.,  chs. 
1,  2;  Economics  of  Industry,  Bk.  II.,  chs.  1,2;  Davenport,  Out- 
lines, ch.  2;  Bullock,  Introduction,  pp.  84-87;  Fetter,  Principles, 
ch.  3;  Gide,  Principles,  pp.  46-49;  Andrews,  Institutes,  §§1,  2,  with 
notes;  Clark,  Philosophy  of  Wealth,  ch.  1;  Kly,  Outlines,  (1908) 
pp.  95-100. 

3.  Production  and  Consumption. 

Production  is  the  creation  of  utility;  the  utility  created 
may  be  of  form,  of  place,  or  of  time.  Consumption  is  the 
destruction  of  utility.  Labor  is  exertion  with  some  other  end 
in  view  than  merely  the  pleasure  involved  in  the  exertion. 
Productive  labor  was  formerly  held  to  be  only  that  which 
produced  utility  in  durable  form.  All  labor  may  be  regarded 
as  productive  which  accomplishes  the  end  in  view;  that  is, 
which  aids  in  the  satisfaction  of  a  want.  Individual  acquisi- 
tion is  not  necessarially  social  production. 

Marshall,  Principles,  Bk.  II.,  ch.  3;  Economics  of  Industry ,  Bk. 
II.,  ch.  3;  Fetter,  Principles,  pp.  43,  257-260;  Seligman,  Princi- 
ples, §§  119,  120;  Clark,  Philosophy  of  Wealth,  ch.  2;  Gide, 
Principles,  pp.  75-80;  Seager,  Economics,  §  6. 

4.  Income  and  Capital. 

A  piece  of  wealth  is  desirable  because  of  the  utility  that 
comes  from  it.  There  is  an  income  of  benefit.  Common 
usage  does  not  apply  this  term  to  the  utilities  coming  from 


12  Fundamental  Concepts. 

consumption  goods;  but  does  apply  it  to  the  utility  coming 
from  wealth  used  in  production  of  further  wealth;  and  also 
extends  the  term  to  any  addition  to  wealth  whether  coming 
from  use  of  land,  from  accumulated  wealth  used  in  produc- 
tion, or  from  human  effort  in  form  of  wages,  salaries  or 
profits.  While  the  income  is  in  reality  one  of  utility  or 
utility-producing  wealth,  it  is  commonly  thought  of  and  ex- 
pressed in  terms  of  money.  We  think  of  income  as  a  stream 
or  flow — not  as  a  store. 

One  may  sell  for  a  lump  sum  his  right  to  receive  indefi- 
nitely an  income  from  a  piece  of  wealth,  that  is,  its  income 
may  be  capitalized  as  may  any  other  income.  Thinking, 
then,  of  such  estimated  lump-sum  or  capitalized  values  of  in- 
comes of  utility,  we  may  say  with  Seligman  that  "the  totality 
of  capital  is  equivalent  to  the  totality  of  wealth."  But  usage 
limits  the  word  capital  from  the  individual  point  of  view  to 
that  "wealth  which  he  devotes  to  acquiring  an  income  in  the 
form  of  money." — (Marshall).  Further  the  usage  of  econo- 
mic discussion  defines  capital  from  the  social  point  of  view  as 
£<the  products  of  past  industry  used  as  aids  to  further  pro- 
duction," (Seager),  excluding  land.  While  the  particular 
pieces  of  capital  may  be  called  capital  goods,  the  business 
man  thinks  of  capital  as  "the  complex  of  capital  goods  used 
in  connection  with  each  branch  of  production  measured  in 
money. ' ' — (Seager) . 

Capital  is  classified  from  point  of  view  of  durability  as 
fixed  or  circulating;  from  point  of  view  of  mobility  as  spec- 
ialised or  free. 

Marshall,  Principles,  Bk.  II.,  ch.  4;  Marshall,  Economics  of 
Industry,  Bk.  II.,  ch.  4;  Seager,  Introduction,  §§  60;  69-71;  Sea- 
ger, Economics,  §§  8,  43;  Seligman,  Principles,  §§  6;  137;  Fetter, 
Principles,  pp.  114-117;  Bullock,  Introduction,  pp.  131-138; 
Davenport,  Outlines,  pp.  119-121;  Gide,  Principles,  pp.  120-129; 
Hadley,  Economics,  pp.  5-7;  Mill,  Principles,  Bk.  I.,  chs.  4,  6; 
Nicholson,  Principles,  Bk.  I.,  ch.6,  except  §  7;  Walker,  Political 
Economy,  Part  II.,  ch.  3;  Andrews,  Institutes,  §§  28,  29;  Hearn, 
Plutology,  ch.  8,  §  1;  Palgrave,  Dictionary,  article  Capital. 


CHAPTER  III. 

NATURE  AND  DEVELOPMENT  OF   ECONOMIC 
SOCIETY. 

I.    Organic  Nature  of  Society. 

A  society  is  not  an  accidental  aggregation  of  unrelated  in- 
dividuals but  is  organic  in  character.  It  has  the  power. of 
growth  from  within;  it  manifests  "differentiation"  or  spec- 
ialisation of  function,  and  "integration"  or  that  close  inter- 
dependence and  inter-relation  of  parts  which  creates  an 
essential  unity.  Social  evolution  is  in  accord  with  the  general 
evolutionary  tendency  from  the  homogeneous,  or  generalized, 
to  the  heterogeneous,  or  specialised.  An  efficient  cause  of 
progress  has  been  that  "struggle  for  existence"  which  results 
in  the  "natural  selection"  of  those  methods,  institutions, 
structures,  groups  i  'which  are  best  fitted  to  derive  benefit 
from  their  environment."  Social  evolution  is  not  merely 
biological  but  largely  psychical  and  increasingly  self-directed. 
Whether  this  evolution  results  in  progress  or  degeneracy  de- 
pends upon  whether  or  not  it  helps  create  a  social  environment 
favorable  to  that  higher  personality  which  is  the  goal  of  human 
existence.  In  the  field  of  economic  structure  and  activity 
the  highly  organic  nature  of  modern  society  is  preeminently 
apparent. 

Marshall,  Principles,  Bk.  IV.,  ch.  8;  Economics  of  Industry, 
Bk.  IV.,  ch.  8;  Fairbanks,  Introduction  to  Sociology,  pp.  31-44; 
Small  and  Vincent,  Introduction  to  the  Study  of  Society,  pp.  87- 
96;  Ritchie,  Principles  of  State  Interference ,  pp.  3-51;  Darwinism 
and  Politics,^.  1-83;  McKechnie,  The  State  and  the  Individual, 
pp.  1-26. 

2.    Characteristics  of  Modern  Industrial  Society. 

Prominent  in  modern  industry  are  separation  of  occupa- 
tions; division  of  labor;  machine  processes;  great  diversity  in 


14  Nature  and  Development  of  Economic  Society. 

required  industrial  skill;  opportunity  for  extensive  wage  em- 
ployment of  unskilled  laborers  including  women  and  children; 
large  industrial  units;  trusts;  loca-1  specialisation  of  industries; 
rapidity  and  cheapness  of  communication  and  transportation; 
wide  markets;  separation  of  industrial  functions;  the  wages 
system;  enormous  employment  of  capital;  profit  as  the  test 
of  success;  money;  the  credit  system  with  its  elaborate 
machinery;  possibility  of  economic  maladjustment;  crises  and 
depressions.  Economic  freedom,  competition  and  recognition 
of  the  private  property  right  are  general  characteristics  of 
modern  society  that  exert  profound  influence  on  all  its 
economic  and  social  relations  and  give  rise  to  many  of  the 
more  special  characteristics  mentioned  above. 

These  characteristics  are  not  the  result  of  conscious  action 
or  catastrophy  but  of  a  long  process  of  evolution. 


3.    Evolution  of  Private  Property. 

From  communal  ownership  is  developed  individual  owner- 
ship of  weapons,  animals,  slaves,  chattels,  land.  The  origin 
of  individual  ownership  is  often  force  and  fraud;  but  the 
development  and  persistence  of  the  system  of  private  property 
rights,  as  distinguished  from  possession,  has  its  real  explana- 
tion in  the  fact  that  that  it  encouraged  industry,  thrift  and 
accumulation  of  wealth  which  aided  the  social  groups  pos- 
sessing them  to  survive.  The  occupation,  natural  rights, 
labor  and  legal  theories  of  private  property  have  been  re- 
placed by  the  social  utility  theory.  The  private  property 
right  in  its  various  aspects  is,  then,  limited  by  this  principle 
of  social  utility. 

Seligman,  Principles,  ch.  9,  and  works  there  cited;  Hadley, 
Economic,  pp.  26-34;  Fetter,  Principles,  pp.  362  369;  Gide, 
Principles,  pp.  428-437;  Ely,  Outlines,  (1893)  pp.  257-264;  Pal- 
grave,  Dictionary  of  Political  Economy  article  Property. 


Nature  and  Development  of  Economic  Society .   1 5 

4.    Evolution  of  Freedom. 

Freedom  in  the  sense  of  positive  capacity  for  self-deter- 
mined action  was  unknown  among  savages.  Subjection  to 
nature,  to  the  strong  and  to  custom  was  accompanied  by  ex- 
termination of  captives.  Slavery,  serfdom  and  the  wage 
system,  each  introduced  because  of  its  relative  economic 
superiority,  were  steps  in  advance.  There  is  now  a  consider- 
able degree  of  freedom  as  of  marriage,  movement,  occupation, 
association,  consumption,  production,  contract,  trade.  Lib- 
erty is  not  an  end  but  a  means  to  that  higher  development 
of  individuality  which  is  the  only  real  freedom.  Liberty 
except  as  based  on  equality  and  a  sense  of  social  responsi- 
bility is  dangerous;  and  hence  we  must  by  social  control 
restrict  liberty  to  secure  freedom.  Positive  individual  free- 
dom is  a  social  product. 

Seligman,  Principles,  ch.  II.;  Hadley,  Economics,  §§  29-44,  78- 
82;  Fetter,  Principles,  ch.  44;  Ely,  Outlines,  p.  42,  pp.  267-270; 
Webb,  Industrial  Democracy,  pp.  844-850;  Problems  of  Modern 
Industry,  ch.  10;  Ritchie,  Principles  of  State  Interference,  pp.  83- 
151;  McKechnie,  The  State  and  the  Individual,  pp.  305-321; 
Ritchie,  Natural  Rights,  pp.  135-147. 


5.    Evolution  of  Competition. 

Competition,  a  form  of  freedom,  has  undergone  develop- 
ment. At  first  largely  a  rivalry  between  groups  it  becomes 
more  and  more  extensive  within  the  group.  Under  modern 
industry  competition  has  tended  constantly  to  replace  custom 
as  a  determinent  of  price.  While  more  necessary,  it  is  also 
more  pregnant  with  danger.  It  is  the  cause  of  progress, 
selecting  those  who  can  best  serve  society,  leading  to  accu- 
mulation of  wealth,  protecting  the  consumer,  encouraging 
energy.  It  is  found  between  commodities,  between  individ- 
uals, between  markets,  between  classes,  between  countries. 
It  involves  dangers  and  without  initial  equality  of  competitors 


1 6  Nature  and  Development  of  Economic  Society. 

may  not  realize  its  benefits.     It  is  limited  and  controlled  by 
custom,  co-operation,  monopoly  or  government  regulation. 

Seligman,  Principles,  ch.  10;  Marshall,  Principles,  (5th  ed.) 
Appendix  A;  Economics  of  Industry,  Bk.  I.,  ch.  2;  Hadley, 
Economics,  §§  76,  77,  87,  97;  Fetter,  Principles,  pp.  425-430; 
Hadley,  Freedom  and  Responsibility,  ch.  5;  Ely,  Evolution  of 
Industrial  Society ,  pp.  123-163;  Palgrave,  Dictionary  of  Political 
Economy  two  articles  on  Competition. 

6.    Evolution  of  Economic  Stages. 

There  have  been  various  explanations  of  economic  develop- 
ment; as,  barter,  money,  credit  economies;  or  from  status 
to  contract;  or  from  a  militant  to  an  industrial  society;  or 
through  hunting,  pastoral,  agricultural,  commercial,  indus- 
trial stages;  or  stone,  bronze,  iron,  steel  ages.  Although 
these  are  all  suggestive  and  partially  true,  they  are  inadequate. 
From  the  economic  standpoint  there  are  '  'three  great  stages 
known  respectively  as  the  self-sufficing  economy,  the  trade  or 
commercial  economy,  and  the  capitalist  or  industrial  econ- 
omy." (Seligman.) 

Seligman,  Principles,  ch.  5  and  works  there  cited;  Ely,  Evolu- 
tion of  Industrial  Society,  pp.  3-73;  Biicher,  Industrial  Evolution, 
chs.  1-3;  Conrad,  Grundnss-,  (1907),  ler  Teil,  §  40. 

7.    Evolution  of  Industrial  Organization. 

a.  Including  under  "industrial  organization"    the  rela- 
tion of  the  producer  to  the  consumer,  of  the  different  classes 
and  occupations  of  workers  to  each  other,  of  the  different 
classes  of  workers  to  capital  and  to  risks  of  sale,  of  hand  work 
to  capital,  we  find  constant  development  of  more  complex 
relations. 

b.  Under  the  "family  system"  "production  was  carried  on 
within  the  family,  by  the  family,  for  the  family."     There  was 
no  market;  no  wage;  no  machinery;  little  division  of  labor; 
little  capital;  little  separation  of  industrial   function.     The 
productive  unit  was  self-sufficing.     Transition  begins  in  the 


Nature  and  Development  of  Economic  Society.    1 7 

hiring  of  itinerant  or  more  permanent  workmen.  This  sys- 
tem is  exemplified  more  or  less  fully  in  the  slave  plantation 
of  early  Rome,  in  the  mediaeval  manor,  in  the  frontier  farm, 
in  the  Southern  plantation. 

c.  Under  the  "guild"  or  handicraft  system  the  producer  of 
a  good  produces  it  for  others;  he  owns  tools  and  material; 
he  works  by  hand;  he  words  at  a  specific  trade;  he  may  em- 
ploy others  but  they  are  "help"  on  their  way  to  independ- 
ence and  a  status  like  his  own;  he  assumes  the  risk  of  finding 
a  market  and  deals  directly  with  the  consumers  of  his  prod- 
ucts.    In   the  Middle  Ages  such  producers  formed  associa- 
tions or  guilds  in  each  trade  to  promote  the  welfare  of  that 
trade.     They  came  to  regulate  conditions  of  work  and  the 
character  of  goods  and  acquired  large   civic   and   political 
power. 

d.  Under  the  domestic  system  the  work  is  done  by  crafts- 
men as  under  the  guild  system,  but  distributed  and  ordered 
by  a  capitalist  who  takes  the  risks  of  sale  and  often  furnishes 
the  materials.     The  typical  producer  under  the  domestic  sys- 
tem did  not  own  raw  material  or  finished  product  and  tended 
to  rent  the  more  expensive  tools.      This    capitalist    is  not 
a   .hand-worker   but   an  employer    or    entrepreneur.      The 
market  is  a  comparatively  wide  one.     Means  of  transporta- 
tion, of  exchange  and  of  handling  capital  are  improved.     In 
the  textile  industries  this  system  was  dominant  in  England 
from  the  sixteenth  to  the  eighteenth  century. 

<?.  Under  \hzfactory  system  there  is  an  enormous  increase 
in  capital  in  the  form  of  buildings,  machinery,  power,  mater- 
ials. Not  only  materials  but  machinery  and  place  of  work 
are  owned  or  are  controlled  by  employer.  To  utilize  power, 
machines  must  be  in  one  place  so  that  many  workers  are  in 
one  factory.  The  worker  is  divorced  from  ownership  of  the 
means  of  production,  and  his  work  is  narrowly  specialized. 


1 8  Nature  and  Development  of  Economic  Society. 

There  is  differentiation  of  industrial  function.  The  market 
is  greatly  widened  by  enormously  improved  means  of  trans- 
portation. Exchange  and  credit  are  highly  organized.  This 
system  began  in  England  at  the  end  of  the  eighteenth  century 
as  a  result  of  great  inventions  in  the  textile  manufacture. 

f.  The  efficient  cause  of  the  development  of  the  later 
systems  has  been  the  superioriiy  of  each  over  the  preceding 
in  producing  goods  cheaply.  In  some  lines  of  work  since 
such  superiority  has  not  existed,  the  development  did  not 
take  place  and  we  have  survivals  of  older  metho.ds. 

There  is  a  large  amount  of  literature  upon  the  different  phases 
of  industry  but  many  of  these  books  are  either  too  voluminous, 
too  detailed,  or  too  neglectful  of  essential  distinctions  to  be  of 
use  in  this  course.  Seager,  Introduction,  ch.  1;  Seligman,  Prin- 
ciples, pp.  88-95;  Ashley,  .English  Economic  History,  passim  as 
Vol.  II.,  pp.  219-222;  Bucher,  Industrial  Evolution,  ch.  4;  Hob- 
son,  Evolution  of  Modern  Capitalism,  chs.  2,  3;  Toynbee,  The 
Industrial  Revolution,  pp.  178-202;  Veblen,  Theory  of  Business 
Enterprise,  chs.  2,  3. 

Required  Readings :  Bullock,  Selected  Readings 
in  Economics,  ch.  5.  The  Organization  of  Produc- 
tion before  and  after  the  Industrial  Revolution. 

8.    Development  of  Economic  Thought. 

a.  The  economic  thought  of  each  age  is  a  reflex  of  its 
economic  life  and  economic  problems. 

b.  The  prevalence  of  slavery  and  the  consequent  contempt 
for  labor  limited  the  economic  thinking  of  the  ancient  world 
to  questions  of  property  right,   division  of  labor,   usury  and 
money. 

c.  The  predominant  religious  character  of  the  age  and  the 
development  of  industry  and  commerce  by  free  labor  made 
the  mediaeval  thinking  center  around  the  ethics  of  price,  in- 
terest and  money. 

d.  The  revival  of  commerce  after  the  Crusades,  changes 
of  price  due  to  money  from  the  New  World,  debasement  of 


Nature  and  Development  of  Economic  Society.    1 9 

coinage  and  particularly  the  growth  of  centralized  states  need- 
ing revenues,  standing  armies  and  navies,  and  owning  colon- 
ies, aroused  much  practical  politico-economic  thinking.  The 
resulting  Mercantile  System  emphasized  the  necessity  to  a 
nation's  welfare  of  a  large  stock  of  money  gained  from  a 
favorable  balance  of  trade;  of  manufactures;  of  shipping;  of 
large  population;  and  of  colonies — all  as  essentials  of  a  suc- 
cessful national  policy.  To  secure  these  a  detailed  system  of 
state  regulation  was  developed. 

<?.  The  philosophical  and  political  thought  of  the  eigh- 
teenth century  and  the  errors  of  the  mercantilist  thinking  led 
to  a  revolt.  The  Physiocrats  emphasized  food  rather  than 
money  as  wealth;  agriculture  as  the  productive  industry  since 
it  alone  was  said  to  give  a  net  product ;  natural  rights  ;  natural 
law ;  and  freedom  of  all  economic  activity  from  governmental 
control.  Laissez-faire.  Quesnay,  Turgot. 

/.  Adam  Smith  was  largely  influenced  by  the  Physiocrats, 
expressing  the  cosmopolitan  point  of  view  and  proclaiming 
natural  liberty  as  a  means  to  general  welfare.  He  finds  in 
all  industry  the  source  of  wealth ;  and  his  theory  of  distribu- 
tion is  a  reflex  of  contemporary  economic  changes  and  con- 
ditions. He  showed  the  social  value  of  economic  self-interest. 
His  Wealth  of  Nations  (1776)  is  the  foundation  of  modern 
economic  thinking. 

g.  Production  for  large  markets,  the  necessity  of  profit, 
the  differentiation  of  industrial  classes,  the  increase  of  capital 
brought  to  the  front  problems  of  value  and  distribution. 
These  were  treated  by  the  English  school  led  by  Ricardo, 
Malthus,  Senior  and  summed  up  by  J.  S.  Mill.  Wealth, 
competition,  non-interference  were  emphasized. 

h.  The  unfortunate  social  results  of  the  new  industrial 
system  and  the  dehumanized  character  of  the  contemporary 
economic  theory  led  to  revolts  on  ethical  groumds  by  Ruskin 


2O  Nature  and  Development  of  Economic  Society. 

and  Carlyle  and  on  theoretical  grounds  by  the  socialists  like 
Karl  Marx. 

/.  The  historical  school  was  a  reaction  from  the  deductive 
a  priori  method  of  the  English  school,  advocating  inductive 
study  and  insisting  upon  the  relativity  of  economic  theory. 

j.  The  Austrian  school  of  the  present  returns  to  the 
deductive  method,  but  has  a  new  psychological  basis  in  its 
theory  of  utility. 

k.  Contemporary  British  and  American  economists,  feel- 
ing the  influence  of  all  these  lines  of  thought,  using  historical 
and  deductive  methods,  accepting  the  theory  of  marginal 
utility,  show,  as  Seligmansays  "how  and  why  social  progress 
and  the  growth  of  capital  are  intimately  bound  up  with  the 
advance  of  the  mass  of  the  workers." 

Seligman,  Principles,  ch.  8;  Andrews,  Institutes,  §§  5-15;  Mar- 
shall, Principles,  Bkl.,  ch.  4;  Gide,  Principles,  pp.  7-14;  Ingram, 
History  of  Political  Economv  (more  conveniently  used  in  its 
original  form  as  the  article  Political  Economy  in  Encyclopaedia 
Britannica);  Cossa,  Introduction,  Historical  Part;  articles  in  Pal- 
grave,  Dictionary,  and  in  the  International  Encyclopedia;  Price, 
Short  History  of  Political  Economy  in  England;  Cohn,  A  History 
of  Political  Economy;  Seager,  Economics,  a  lecture  delivered  at 
Columbia  University. 


CHAPTER  IV. 
WANTS  AND  THEIR  SATISFACTION  :  DEMAND. 

I.    The  Nature  and  Economic  Significance  of  Wants. 

Human  wants  vary  with  race,  climate,  stage  of  civilization, 
individual  development  physically,  intellectually,  aestheti- 
cally, morally,  religiously.  They  are  capable  of  indefinite 
expansion ;  limited  in  intensity  ;  competitive  ;  complemen- 
tary; largely  matters  of  habit  and  fashion.  The  want  is  the 
cause  of  economic  activity.  Wants  cause  activities,  but 
activities  cause  new  wants. 

Required  Reading,  Bullock,  Selected  Readings  in 
Economics,  pp.    236-245,  Hearn,  Human  Wants. 

Marshall,  Principles,  Bk.  III.,  ch.  2;  Economics  of  Industry, 
Bk.  III.,  ch.  2;  Bullock,  Introduction,  pp.  79-84;  Seager,  Intro- 
duction, §§  34,  37;  Fetter,  Principles,  ch.  2;  Gide,  Principles, 
pp.  40-45;  Hearn.  Plutology,  ch.  1;  Andrews,  Institutes,  pp.  190- 
194;  Davenport  Outlines,  §  8;  Smart,  Introduction  to  the  Theory 
of  Value,  chs.  1-4 

2.    The  Nature  of  Demand  as  Based  Upon  Diminishing  Utility. 

a.  Utility  is  capacity  to  satisfy  a  want  and  in  economic 
terminology  does   not  necessarily  mean  productive  of  well- 
being.     Demand  denotes  effective  desire ;  i.e.,  the  quantity 
that  will  be  taken  at  a  given  price. 

b.  "The  utilities  of  additional  units  of  any  good  to  any 
consumer  diminish   naturally  as  his  supply  of  units  of  that 
good  increases."      (Seager). 

c.  Consequently,  although  he  might  use  much  more   of 
the  articles  if  it  were  a  free  good,  he  ceases  his  purchases  at 
the  point  where,  in  his  estimation,  the  utility  of  the  last  addi- 


22       Wants  and  their  Satisfaction;   Demand. 

tion  to  his  stock  is  only  equal  to  its  cost.  The  utility  of  this 
last  portion  acquired  is  the  marginal  utility  of  the  commodity 
to  him. 

d.  It  follows  that,  as  the  price  is  lowered,  the  purchase  of 
additional  units  will  be  made  since  their  utilities  will  success- 
ively equal  the  falling  price ;  and,  as  the  price  rises,  pur- 
chases will  be  diminished,  since  this  rising  price  will  success- 
ively be  greater  than  the  estimate  of  the  utility  of  the  units 
previously  bought.  Hence  results  the  Law  of  Demand,  that 
other  conditions  remaining  the  same,  the  amount  demanded 
increases  with  a  fall  and  decreases  with  a  rise  in  price.  The 
larger  the  supply,  the  lower  the  price  at  which  it  can  be  sold. 

e*  Demand  schedules  of  individuals  are  different,  because 
the  marginal  utility  of  money  varies  to  different  persons  and 
because  of  varying  intensity  of  desire. 

f.  4<  Value  is  not  merely  the  expression  of  marginal  util- 
ity; it  is  the  expression  of  social  marginal  utility."     (Selig- 
man).       " Value  in    industrial  society  is  the  result  of  social 

valuation.  It  is  not  so  much  man's  estimate  as  society's  esti- 
mate of  marginal  utility."  (Seager). 

g.  "Most  goods  are  not  simple  utilities  but  bundles  of 
utilities,"  (Seager)  and  "  value  is  the  expression  of  the  social 
marginal  increments  of  utility  which  are  bundled  together  or 
united  in   anything,  and   each    of  which   is    marginal  to   a 
different  class. "      (Seligman). 

Marshall,  Principles,  Bk.  III.,  ch.  3  ;  Economics  of  Industry, 
Bk.  III.,  ch.  3;  Seager,  Introduction,  pp.  81-98;  Seager,  Econo- 
mics, §§  12-15 ;  Seligman,  Principles,  ch.  12 ;  Fetter,  Principles, 
pp.  21-29 ;  Gide,  Principles,  pp.  52-59 ;  Bullock,  Introduction, 
pp.  88-97,  110-113;  Flux,  Economic  Principles,  pp.  20-25;  Pier- 
son,  Principles,  pp.  54-61  ;  Carver,  Distribution,  pp.  1-27 ; 
Clark,  Distribution,  ch.  16 ;  Davenport,  Outlines,  pp.  14-16,  35- 
37  ;  Smart,  Introduction  to  Theory  of  Value,  chs.  6,  7. 


Wants  and  their  Satisfaction :   Demand.       2  3 

3.    Elasticity  of  Demand. 

Elasticity  of  demand  refers  to  the  degree  in  which  demand 
responds  to  changes  in  price.  It  varies  greatly  according  to 
the  nature  of  the  article  and  the  income  of  the  purchaser. 

Marshall,  Principles,  Bk.  III.,  ch.  4;  Economics  of  Industry, 
Bk.  III.,  ch.  4;  Seager,  Introduction,  pp.  66,  67;  Seligman, 
Principles,  §  102;  Fetter,  Principles,  p.  29;  Flux,  Economic 
Principles,  pp.  25-31. 

4.    Comparison  of  Utilities. 

'  'If  a  person  has  a  thing  which  he  can  put  to  several  uses, 
he  will  distribute  it  between  these  uses  in  such  a  way  that  it 
has  the  same  marginal  utility  in  all.  For  if  it  had  a  greater 
marginal  utility  in  one  use  than  another,  he  would  gain  by 
taking  away  some  of  it  from  the  second  use  and  applying  it 
to  the  first."  (Marshall).  Similarly  one's  total  expendi- 
ture of  money  or  effort  tends  to  be  so  directed  that  marginal 
utilities  in  different  lines  will  be  equal. 

"The  utility  of  future  goods -is  less  to  the  normal  consumer 
than  the  utility  of  present  goods  of  like  kind  and  quality 
by  an  amount  varying  directly  with  the  degree  of  futurity." 
(Seager). 

Marshall,  Principles,  Bk.  Ill,  ch.  5 ;  Economics  of  Industry, 
Bk.  III.,  ch.  5;  Seager,  Introduction^  §  36;  Bullock,  Introduc- 
tion, §  61 ;  Davenport,  Outlines,  §§  29-32. 

Required  Reading:  Bullock,  Selected  Readings  in 
Economics,  pp.  245-254 ;  Jevons,  The  Theory  of 
Utility. 


CHAPTER  V. 
PRODUCTION  OF  WEALTH  :  SUPPLY. 

A.  GENERAL,   CONSIDERATIONS. 

a.  Production  is  the  creation  of  utilities  of  form,  time  or 
place  ;    and  is  closely  related  to  consumption. 

b.  Production  involves  sacrifice  and  time. 

c.  The  factors  of  production  are  nature,  labor,  capital. 
Since  production  is  a  social  process,  the  efficiency  of  these 
factors  will  depend  largely  upon  the  system   or  organization 
that  brings  them  together ;  and  upon  due  appreciation  of  the 
significance  of  the  human  factor. 

Seligman,  Principles,  ch.  18;  Marshall,  Principles,  Bk.  IV., 
ch.  1;  Economics  of  Industry ',  Bk.  IV.,  ch.  1  ;  Seager,  Introduc- 
tion, §§  27,  28  ;  Fetter,  Principles,  ch.  28;  Bullock,  Introduction, 
pp.  115-118 ;  Andrews,  Institutes,  §§  18-22 ;  Mill,  Principles  Bk. 
I.,chs.  1,  2,  3;  Clark,  Philosophy' of  Wealth,  ch.  2;  Nicholson 
Principles,  Bk.  I.,  ch.  2;  Elements,  pp.  32-47. 

B.  NATURE. 

1.  Classification  of  Nature's  Contribution  to  Production. 

2.  Influence  of  Nature  Upon  Man's  Economic  Life. 

Required  Reading :  Bullock,  Selected  Readings  in 
Economics,  pp.  1-22 ;  Shaler,  The  Effect  oj  the 
Physiography  of  North  America  upon  men  of  Euro- 
pean Origin. 

3.  Exhaustion   of  Natural   Wealth. 

a.  Some  natural  resources  may  be  permanently  exhausted. 

b.  Some  natural   resources  are    incapable   of  permanent 
exhaustion. 


Production  of  Wealth :   Supply.  25 

c.     Some  natural  resources  replace  themselves  more  or  less 
completely  by  growth. 

4.    Man's  Ability  to   Prevent  Exhaustion  and  Increase  Pro- 
ductivity. 

a.  Minerals  cannot  be  increased.     Necessity  of  economy 
in  utilization.     Progress  of  science  makes  possible  utilization 
of  low  grade  ores,  which  practically  means  an   increase    in 
quantity. 

b.  Fisheries  in  some  cases  seem  inexhaustible.     In  other 
cases  much  may  be  done  to  overcome  tendency  to  exhaustion. 

c.  Forests.     American   tendencies.       Need    of  scientific 
forestry. 

d.  Limited  area  of  desirable  building  land.     Methods  oi 
overcoming  this  limit.     Modern  building  methods.     Rapid 
transit. 

e.  Fertility  of  the  soil  for  agricultural  uses  may  be  in- 
creased  by  cultivation  ;    soil    mixture ;  irrigation  ;    draining 
and  clearing ;  fertilization  ;    artificial  climatic  conditions. 

Required  Reading  :  Bullock,  Selected  Readings 
in  Economics,  pp.  73-103  containing  official -papers 
upon  American  Agriculture. 

5.    The   Law  of  Diminishing    Returns. 

a.  At  any  particular  time  and  in  any  particular  stage  of 
soil  exhaustion   and  scientific    knowledge,   successive    equal 
applications  of  effort  to  a  given  area  of  land  will,  after  a 
certain  point  is  reached,  yield  returns  less  than  proportionate. 

b.  Because  of  this  fact  of  diminishing  returns,  there  is  a 
point  beyond  which  a  further  expenditure  of  effort  or  money 
will  be  greater  than  the  resulting  returns  to  that  added  out- 
lay.    This  is  the  margin  of  cultivation.     In  the  case  of  some 
land    this   point   is   reached   only  after  much  outlay  (many 
' '  doses  ' '   of  capital  and  labor,  as  Professor  Marshall  says) ; 


26  Production  of  Wealth  :   Supply. 

other  land  is  so  poor  that  no  cultivation  pays ;  still  other 
land  is  on  the  margin  of  cultivation  since  its  most  ordinary 
cultivation  ("one  dose  ")  is  just  paid  for  by  the  product. 

c.  The  law  of  diminishing  returns   is   frequently  errone- 
ously thought  to  refer  to  exhaustion  of  the  soil. 

d.  This  law  is  frequently  erroneously  thought  to  refer  to 
successive  periods  of  time. 

Marshall,  Principles,  Bk.  IV.,  chs.  2,  3;  Economics  of  Indus- 
try, Bk.  IV.,  chs.  2,  3;  Seligman,  Principles,  §§  16-19,  88,  132- 
135 ;  Seager,  Introduction,  §§  61-66 ;  Bullock,  Introduction,  §§ 
76,  96-99;  Gide,  Principles,  pp.  86-103;  Fetter,  Principles,  ch.  7, 
§§  ii.;  ch.  9;  ch.  11;  Mill,  Principles.  Bk.  I.,  ch.  12;  Andrews, 
Institutes,  §§  23,  24,  34,  39 ;  Hearn,  PLutology,  chs.  5,  6 ;  Nichol- 
son, Elements,  Bk.  I.,  ch.  6;  Principles,  Bk.  I.,  chs.  4,  10; 
Kropotkin,  Fields^  Factories  and  Workshops,  chs.  3-5  ;  Seager, 
Economics,  ch.  4. 

C.    LABOR. 

I.    General  Considerations  Regarding  Labor. 

a.  Definition.     Productive  and  unproductive  labor.     (See 
ch.  ii.,  3). 

b.  Labor  of  different  individuals  varies  greatly  in  its  pre- 
dominant characteristics — some  being  largely  muscular,  some 
manual,  some  inventive,  so  ne  supervisory,  some   protective, 
etc. 

c.  Ordinarily  every  satisfaction  of  a  want  involves  the 
performance  of  labor  on  the  part  of  some  one. 

d.  Work,  which,  within  certain   limits   may  be  pleasure, 
education  and  wholesome  discipline,  becomes,  if  continued, 
irksome   toil,    intellectually  stunting,  morally  debasing  and 
economically  less  productive. 

e.  The    labor  force  of  a  country  depends  upon  its   (i) 
Quantity;   (2)  Quality. 


Production  of  Wealth :   Supply.  27 

2.    Amount  of  the  Labor  Force. 

a.  The  labor  force  of  a  country  depends  directly  upon 
the  population.     Increase  of  population  depends  upon 

(1)  The  birth  rate.      This  is  influenced  by  the  marriage 
rate  which  is  affected  by  conditions  of  prosperity.      This  lat- 
ter influence  is  due  to  the  private  property  right,  and   to 
parental   rather   than  social   responsibility  for  maintenance. 
The  number  of  births  per  marriage  varies  greatly  with  race, 
nationality,    social    and     economic     condition.      In   recent 
years  it  has  decreased  in  the  United  States,  England  and 
some  other  countries,  partly  because  of  an  increasing  standard 
of  comfort  and  partly  because  of  certain  social  tendencies. 

(2)  The  death  rate.     This  is  dependent  upon  many  con- 
siderations— sanitary,  medical,  social,  industrial  and  govern- 
mental.    Other  conditions  remaining  constant,  the  death  rate 
tends  to  decrease  with  increasing  prosperity. 

(3)  Migration.      The   balance   between    emigration   and 
immigration  is  an  important  influence  upon  the  population  of 
certain  countries.     In  the  United  States  immigration  responds 
quickly  to  prosperity. 

(4)  Prosperity  tends  to  increase  the  rate  of  increase  of 
population  in  the  United  States  since  it  accelerates  the  birth 
rate  and  immigration,  and  retards  the  death  rate. 

(5)  It  is  socially  better  to  maintain  a  certain   increase  of 
population  by  a  low  birth  rate  and  a  low  death  rate  than  by  a 
high  birth  rate  and  a  high  death  rate. 

Required  Reading :  Bullock,  Selected  Readings  in 
Economics,  pp.  255-275;  Riimelin,  Movement  of 
Population. 

b.  The  labor  force  of  a  country  is  affected  by  the  distribu- 
tion of  population  by  age  periods.     The  number  of  efficient 
laborers  will  be  smaller  in  a  country  in  which  there  is  an  un- 
due proportion  of  young  children. 


28  Production  of  Wealth :   Supply. 

c.  The  labor  force  of  a  country  is  affected  by  the  distribu- 
tion of  the  population  between  productive  and  non-productive 
classes.     In  the  latter  are  paupers,    insane,   tramps,   idle  rich 
and  other  drones.     It  is  also  decreased  if  there  are  too  many 
relatively  in  certain  professions  or  occupations,   so  that  they 
are  not  fully  employed.     Certain  countries  suffer  because  the 
class  of  priests  is  relatively  too  large,  being  recruited  by  non- 
economic  causes. 

d.  The  amount  of  labor  depends  upon  the  number  of  days 
in  the  year  and  hours  in  the  day  devoted  to  work.     Many 
holidays  for  religious  or  other  reasons  and  short  working  days 
seriously  decrease  productiveness  in  certain  countries.     How- 
ever, a  lack  of  holidays  and  rest  days  and  an  excessive  dur- 
ation of  the  work  day  exert  an  unfortunate  influence  on  the 
efficiency  of  the  laborer  and  decrease  production. 

e.  An  increase  in  the  population  may  exert  an  influence 
on  production  less  than  proportionate  if  it  involves  pressure 
on  subsistence ;  or  more  than  proportionate  if  it  allows  co- 
operation and  organization  to   a   greater   extent  than  were 
previously  possible. 

/     NOTE.     Malrhus'  Theory  of  Population. 

Thomas  Robert  Malthus  in  the  first  edition  of  his  Essay  on 
Population  (1798)  maintained  against  Condorcet,  Godwin 
and  others,  that  great  progress  in  human  happiness  was  im- 
possible since  population  tended  to  increase  geometrically, 
while  food  increased  only  arithmetically ;  with  the  result  of 
pressure  upon  subsistence,  except  so  far  as  population  was 
limited  by  other  positive  checks,  such  as  vice,  war,  famine. 
The  admission,  in  a  second  edition  (1803),  of  the  possibility 
of  the  preventive  check  of  "  moral  restraint "  made  more 
correct  his  theory  of  population,  but  ruined  his  argument 
against  the  perfectionists.  Against  Malthus'  theory  it  is 
urged  that  there  are  physiological,  social  and  economic  hin- 
drances which  prevent  the  birth  rate  attaining  its  maximum ; 


Production  of  Wealth :  Supply.  29 

and  that  progress  in  science  and  the  arts  reveals  almost 
unlimited  possibilities  of  improvement  in  raising  and  working 
up  food  supply  and  raw  material.  It  is  also  claimed  an 
increasing  population  is  relatively  more  efficient  because  of 
better  organization. 

Required  Reading^  Bullock,  Selected  Readings  in 
Economics,  pp.  275-286 ;  Extracts  from  Malthus* 
Essay. 

Marshall,  Principles,  Bk.  IV.,  ch.  4;  Economics  of  Industry, 
Bk.  IV.,  ch.  4;  Seligman,  Principles,  ch.  4  and  §  130;  Seager, 
Introduction,  pp.  283-294;  Bullock,  Introduction,  §§  77-78;  Fet- 
ter, Principles,  chs.  20,21;  Andrews,  Institutes,  §§  25,  26,  27/35; 
Hadley,  Economics,  pp.  41-51 ;  Gid'e,  Principles,  pp.  71-85,  666- 
669;  Mill,  Principles,  Bk.  I.,  chs.  2,  3,  10 ;  Nicholson,  Prin- 
ciples, Bk.  I.,  chs.  5,  11;  Elements,  Bk.  I.,  ch.  7;  Walker, 
Political  Economy,  pp.  .301-314;  George,  Progress  and  Poverty, 
pp.  81-124 ;  Seager,  Economics,  pp.  205-214. 

3.    Efficiency  of  the  Individual   Laborer. 

a.  The  laborer  is  as  a  rule  more  efficient  as  he  is  a  well 
developed  man.     Muscular  strength,  nervous  energy,  intelli- 
gence, taste,  character  affect  his  productivity,  although  their 
relative  importance   in  different   occupations  varies  greatly. 
Nervous  energy,  intelligence,  character  (in  the  sense  of  hon- 
esty,  industry,  accuracy,  resourcefulness,   reliability)  are  in 
every   line    of  work   important.       In    some   lines    muscular 
strength  has  become  relatively  less  necessary.     One  of  the 
serious   indictments   against   our   present  industry  is  that  it 
blunts  the  artistic  sense ;  but  there  is  a  growing  perception 
of  the  need  for  taste  in  many  lines  of  manufacture. 

b.  The    qualities  which    make    one   an   efficient  laborer 
depend    largely  upon    the   Standard  of  Living  and  respond 
more  or  less  closely  to  its  changes.     The  Standard  of  Living 
is  largely  dependent  upon  income.     The  quantity,  kinds  and 
combinations  of  food  ;   its  preparation  and  cooking ;  housing 
accommodations,   reasonable  leisure,  proper  recreations  and 
amusements ;  time  and  means  for  education  ;  avoidance  of 


30  Production  of  Wealth :   Supply. 

improper  expenditure  for  stimulants  and  narcotics,  etc.,  react 
sooner  or  later  on  efficiency. 

b.  Hope,  freedom,  security  and  incentive  affect  product- 
iveness. Hence  the  system  of  industrial  remuneration  whether 
slavery,  time  wages,  piece  wages,  profit  sharing,  co  operation, 
premium-plan,  economic  independence  is  significant.  The 
social  system  and  the  government  have  their  effect,  as  have 
systems  of  land  tenure  and  the  property  right. 

d.  Occupation  and    industrial    conditions   affect  general 
vigor,  nervous  energy,  intellectual  and  artistic  development, 
moral  character.     This  is  particularly  important  in  the  case 
of  children,  since  they  are  in  an  undeveloped  formative  con- 
dition.    Even  from 'the  merely  economic  point  of  view.,  child 
labor  is  objectionable  as  a  great  draft  on  future  efficiency. 
Compulsory  education  and  factory  laws  are  aids  to  efficiency. 

e.  Modern  city  life  has  its  effect  on  the  productive  effi- 
ciency of  the  laborer  because  of  housing  congestion,  lack  of 
air  and  play  grounds,  undue  nervous  stimulus,  spread  of  con- 
tagion, etc.     The   strongest   physique,  nervous   energy   and 
character  of  the  country  tend  toward  the  city  and  there  tend 
to  be  exhausted.     Such  evil  tendencies  may  be  largely  over- 
come by  social  effort. 

/.  Efficiency  is  increased  by  education  whether  of  common 
school,  high  or  college,  whether  liberal,  manual,  trade  or 
technical.  Much  education  comes  from  other  agencies  than 
the  school,  as  the  home,  the  factory  or  shop,  the  systematic 
apprenticeship. 

g.  The  economic  efficiency  of  a  worker  is  largely  deter- 
mined by  the  economic,  intellectual,  artistic,  political,  moral 
standards  and  institutions  of  the  society  in  which  he  lives 
and  especially  of  the  social  class  to  which  he  belongs.  Man 
is  a  social  product. 


Production  of  Wealth :  Supply.  3 1 

h.  An  individual's  efficiency  depends  largely  upon  his 
finding  that  place  for  which  he  is  most  fit.  Anything  which 
hinders  such  adjustments,  as  social  and  industrial  grades,  or 
inequality  of  opportunity  interferes  with  social  efficiency.  So 
far  as  a  greater  degree  of  economic  equality  is  naturally  se- 
cured, it  increases  equality  of  opportunity  and  hence  efficiency. 

/.  Economic  progress,  like  social  progress  generally,  has 
depended  upon  the  elimination  of  the  inefficient  and  the 
selection  of  the  efficient.  Although  humanitarian  efforts  to 
prevent  such  elimination  may  and  sometimes  do  tend  to  in- 
terfere with  progress  in  economic  efficiency,  we  need  not  con- 
clude that  such  philanthropy  is  necessarily  uneconomic.  Ef- 
ficiency depends  partly  upon  the  acquirement  of  much  race 
tradition,  knowledge,  skill.  Those  naturally  prone  to  elimi- 
nation but  preserved  by  philanthropy  may  by  such  acquire- 
ment become  efficient.  Further  the  qualities  of  character 
necessary  for  efficiency  in  a  society  are  not  entirely  the  same 
as  those  for  a  Robinson  Crusoe.  Philanthropy  by  cultivating 
social  traits  may  indirectly  promote  efficiency. 

j.  Although  those  qualities  which  produce  efficiency  are 
partly  the  result  of  non-economic  causes,  still  in  a  large  de- 
gree economic  efficiency  is  a  direct  response  to  the  demand 
for  it  is  as  shown  in  wages,  salary  and  profits. 

Marshall,  Principles,  Bk.  IV.,  chs.  5,  6;  Economics  of  Indus- 
try, Bk.  IV.,  chs.  5,  6;  Fetter,  Principles,  pp.  195-201;  Seager, 
Introduction,  pp.  120-125 ;  Seligman,  Principles,  §§  126,  130 
Mill,  Principles,  Bk.  I.,  ch.  7,  Bk.  II.,  chs.  59;  Hearn,  Plu- 
tology,  chs.  3,  4;  Hadley,  Economics,  §§  22-27,  362-368  ;  Nichol- 
son, Principles,  Bk.  I.,  ch.  5,  §  4;  Andrews,  Institutes,  §36. 
Seager,  Economics,  §§  40,  41. 

D.    CAPITAL. 

1.  Definition  and  Distinctions.    (See chap,  ii.,  4.) 

2.  Forms  Which  Capital  Assumes. 

Bullock,  Introduction,  pp.  133-135;  Seager,  Introduction  pp 
132-134,  Seligman,  Principles,  §  137  ;  Marshall,  Principles,  Bk. 
IV.,  ch.  7,  §§  1-3;  Economics  of  Industry,  Bk.  IV.,  ch.  7,  §  1 ; 
Andrews,  Institutes,  §  29 ;  Seager,  Economics,  §  46. 


32  Production  of  Wealth  :   Supply. 

3.    Advantages  of  Capitalistic  Production. 

Although  indirect  and  involving  delay,  capitalistic  pro- 
duction is  advantageous  since  it  enables  man  to  employ  his 
strength  more  effectively  or  to  use  natural  forces  otherwise 
useless. 

Seager,  Introduction,  pp.  125,126,  134, 335  ;  Bullock,  Introduc- 
tion, pp.  131,  132;  Seligman,  Principles,  §§138,  340;  Hearn, 
Plutology,  ch.  8,  §§  2-4;  Seager,  Economics,  §§  42,  47. 

4.    Capital  Subject  to  the  Law  of  Diminishing  Returns. 

Although  capita]  enormously  increases  production,  it  is 
still  true  that,  at  any  particular  time,  with  a  constant  labor 
force  and  provided  there  be  no  change  in  industrial  knowledge 
and  methods,  the  law  of  diminishing  returns  holds  true  in 
the  case  of  successive  units  of  capital. 

Seager,  Introduction,  pp.  128, 129  ;  Fetter,  Principles,  pp.  61, 62, 
66  72  ;  Seligman,  Principles,  §  168;  Seager,  Economics,  §  44. 

5.    Capital    Involves    "Abstinence"    or    "Waiting";    and    its 
Accumulation  Depends  upon 

a.  Ability  to  save,  or  surplus  of  income  above  expenditure. 

b.  Willingness    to    save  which   is    encouraged    by  family 
affection,  political   and   economic   security,  a   high   rate    of 
interest,  intelligence,  and  morality.     Since  a  future  utility  is 
regarded  as  less  desirable  than  a  present  one,  saving  is  largely 
dependent  upon  a  rate  of  interest  high  enough  to  overcome 
the  superior  attractiveness  of  a  present  good.     Some  saving, 
however,  is  regardless  of  the  rate  of  interest,  having  in  view 
a  sum  rather  than   an  income,  while  in  other  cases  the  deter- 
mination to  secure  a  certain  income  results  in   greater  saving 
with  a  low  than  with  a  high  rate  of  interest. 

Marshall,  Principles,  Bk.  IV.,  ch.  7,  §§  4-10;  Economics  of 
Industry,  Bk.  IV.,  ch.  7,  §§  2-6;  Bullock,  Introduction,  pp.  140, 
141  ;  Fetter,  Principles,  ch.  19 ;  Seligman,  Principles,  §  139 ; 
Gide,  Principles,  pp.  688-692,  129-131;  Mill,  Principles,  Bk.  I., 
ch.  11;  Nicholson,  Principles,  Bk.  I.,  ch.  12;  Elements,  Bk.  I., 
ch.  8;  Hearn,  Plutology,  ch.  9;  Seager,  Economics,  §  116. 


Production  of  Wealth  :   Supply.  33 

6.  Methods  of  Accumulating  Capital. 

a.  By  saving  and  investing. 

b.  By  borrowing  and  investing. 

c.  Accumulation  of  capital  is  much  facilitated  by  modern 
financial    methods   and    institutions,  such    as  banks,  savings 
banks,  insurance  companies,  building  and  loan  associations, 
etc.,  and  by  the  representation  of  ownership  by  transferable 
stocks  and  bonds. 

Seager,  Introduction,  pp.  130-132,  Seager,  Economics,  §  45  ; 
Bullock,  Introduction,  p.  139  ;  Gide,  Principles,  pp.  692-694,  697- 
700 ;  Hamilton,  Savings  and  Savings  Institutions. 

7.  Social  Utility  of  Saving  Capital. 

Economic  (and  hence  social)  progress  has  been  largely 
dependent  upon  the  accumulation  of  capital,  since  the  amount 
of  wealth  production  is  largely  determined  by  the  quantity 
and  form  of  capital.  But  wealth  production  is  even  more 
dependent  upon  the  skill  and  training  of  the  members  of 
society.  Social  progress  depends  upon  due  proportion 
between  saving  and  wise  consumption. 

Hamilton,  Savings  and  Savings  Institutions,  ch.  1  ;  Gide, 
Principles,  pp.  694-697 ;  Hadley,  Economics,  p.  147 ;  Hearn, 
Plutology,  ch.  8,  §§  5-8 ;  Hobson,  Evolution  of  Modern  Capital- 
ism, pp.  182-209. 

8.    Supply  Price  of  Capital. 

There  is  a  direct  response  of  the  supply  of  capital  to  the 
demand  for  it  as  revealed  by  changes  in  the  rate  of  interest. 

Required  Readings  :  Bullock,  Selected  Readings  in 
Economics,  pp.  301-306,  The  Doctrine  of  Mill,  and 
pp.  318-324,  Hobson,  Criticism  of  the  Doctrine  of 
Saving. 


34  Production  of  Wealth  :   Supply. 

E.     INDUSTRIAL  ORGANIZATION. 

I.    Production  a   Social    Process. 

Production  is  not  individual  but  a  complicated  social  affair 
involving  much  "differentiation"  of  occupation,  of  pro- 
cess, of  function,  of  locality.  This  differentiation  involves 
interdependence  of  the  parts  of  the  industrial  organization. 
While  this  enormously  increases  the  efficiency  of  production, 
it  involves  serious  maladjustments  and  makes  an  injury  to  a 
part  the  concern  of  all. 

Marshall,  Principles,  Bk.    IV.,    ch.  8;  Economics  of  Industry, 
Bk.  IV.,  ch.  8;  Hearn,  Plutology,  pp.  291-305. 

2.    Division  of  Labor:  Co-operation. 

a.  The  productive  efficiency  of  a  people  is  much  increased 
by  the  co-operative  efforts  of  workers.     Co-operation  even 
without  differentiation  of  work  often  promotes  efficiency,  but 
the   economic  gain  is  most  apparent  when  each   instead  of 
being  a  Jack-of-all-trades  becomes  a  specialist. 

b.  The  cause  is  found  in  the  economic  advantage  of  a  low- 
ering of  cost  of  production.     This  is  due  to   (i)  increased 
dexterity;    (2)   shortening  of  apprenticeship  ;    (3)  saving  of 
time  in  changing  work ;   (4)  stimulus  to  invention ;   (5)  econ- 
omy of  ability  ;    (6)  economy  of  material  ;    (7)  economy  of 
tools  and  machinery. 

c.  Against  the  immediate  economic  gain  are  alleged  social 
disadvantages  some  of  which  are  in  the  long  run  causes  of 
economic  loss.       Such  are  physical  injury,  monotony  leading 
to  intellectual  deterioration,  dependence  because  of  the  nar- 
rowing of  the  field  of  employment,  excessive  employment  of 
women  and  children,  destruction  of  the  aesthetic  and  con- 
structive faculties.     These  are  in  part  preventable  by  protect- 
ive labor  legislation,  shortening  of  the  hours  of  work  and  an 
increase  of  educational  and  cultural  opportunities  outside  of 
working  hours. 


Production  of  Wealth  :   Supply.  35 

d.  The  application  of  the  principle   of  division   of  labor 
depends  directly  upon  the  size  of  the  market,  which  is  deter- 
mined by  the  growth  of  population  and  the  increase  of  trans- 
portation facilities. 

e.  In  modern  industry  there  is  a  tendency,  as  a  particular 
process  comes  to  be  mechanical  and  monotonous,  for  a  ma- 
chine to  take  it  over.     Frequently  these  separate  machines  are 
combined  or  replaced  by  a  perfecting  machine  so  that  instead 
of  many  specialized  laborers  there  are  a  few  high  grade  labor- 
ers controlling  and  tending  a  complicated  piece  of  mechanism. 

Smith,  Wealth  of  Nations,  Bk.  I.,  chs.  1,  2,  3 ;  Marshall, 
Principles,  Bk.  IV.,  ch.  9;  Economics  of  Industry,  Bk.  IV.,  ch. 
9;  Gide,  Principles,  pp.  173-182;  Seager,  Introduction,  pp.  137- 
142  ;  Seager,  Economics,  §  48-52  ;  Bullock,  Introduction,  pp.  143- 
147;  Seligman,  Principles,  §§  127-129;  Mill,  Principles,  Bk.  I., 
ch.  8;  Fetter,  Principles,  pp.  201-204;  Nicholson,  Principles, 
Bk.  I.,  ch.  7;  Elements,  Bk.  I.,  ch.  3;  Hearn,  Plutology,  chs. 
12,  13  ;  Andrews,  Institutes,  pp.  69-73 ;  Walker,  Political 
Economy,  pp.  56-59 ;  Ely,  Outlines,  (1908)  pp.  127-131 ;  Hobson, 
Evolution  of  Modern  Capitalism,  ch.  4,  §§  3-7;  Plato,  Republic, 
Bk.  II.,  369-371;  Commons,  Labor  Conditions  in  Slaughtering 
and  Meat  Packing ,  Quar.  Jour.  Econ. .  19 :  1 — Same  article  in 
Commons,  Trade  Unionism  and  Labor  Problems,  pp.  223-228 ; 
see  also  pp.  324-329 ;  Palgrave,  Dictionary,  article  Division  of 
I^abor. 

Required  Reading  :  Bullack^  Selected  Readings  in 
Economics,  ch.  10,  con  faming  extracts  from  Adam 
Smith  and  Jevons. 

3.    Localization  and  Specialization  of  Industry. 

a.  Not    infrequently  a    considerable    proportion    of    an 
industry  is  localized   in  a  district,  city  or    town.     In  some 
cases   a   large   proportion    of  all  the  industrial  activity  of  a 
region  or  city  is   occupied  in  one  industry.     The  former  is 
called  localization  of  industry  and  the  latter  specialization  of 
industry. 

b.  The  original  cause  of  such  localization  or  specialization 
is   usually  the  presence    of  raw  material ;  favorable   soil  or 
climate ;  transportation  facilities ;  sources   of  cheap  power ; 
racial  qualities. 


36  Production  of  Wealth  :   Supply. 

c.  When    an   industry  has  once    established    itself,    new 
concerns   tend   to  the  same  place  because  of  its  advantages, 
such  as  trade  knowledge  prevalent  there  ;  a  local   market  for 
skill ;    subsidiary    trades ;    ability   to    utilize    by-products  ; 
specialized  machinery  ;  general  good  trade  repute.     Speciali- 
zation involves  some  disadvantages,  as  too  exclusive  a  demand 
for  one  kind  of  labor,  severe  trade  depressions,  serious  labor 
troubles. 

d.  Localization  and  specialization  are  limited  by  size  of 
the  market  and  hence  have  tended  to  increase  with  improve- 
ment of  transportation  facilities. 

e.  Since  social  and  economic  conditions  of  localities  are 
subject  to  change,  industries  once   localized  may  migrate  to 
new  centers. 

Twelfth  Census  of  the  United  States,  1900,  VII.,  pp.  cxc-ccxiv.; 
Marshall,  Principles,  Bk.  IV.,  ch.  10;  Economics  of  Industry, 
Bk.  IV.,  ch.  10;  Hobson,  Evolution  of  Modern  Capitalism,  pp. 
24-30,  105-116,  Hearn,  Plutology,  pp.  305-314. 

Required  Reading :  Bullock,  Selected  Readings  in 
Economics,  pp.  165-184,  oontaining  extracts  from 
Reports  of  the  Twelfth  Census. 

4.    Size  of  the  Business  Unit. 

a.  Efficiency  of  production  is  contingent  upon  the  adjust- 
ment of  the  size  of  the  business  unit  in  each  trade  to  its  par- 
ticular needs.     The  tendency  in  typical  modern  industries  has 
been    toward    enormously    large    establishments    employing 
thousands  of  laborers  and  millions  of  capital.     In  many  lines 
of  trade  and  manufacture  the  small  establishment  still  prevails. 

b.  Advantages  of  the  large  producer: 

(i)  On  the  manufacturing  or  productive  side.  Economy 
of  fixed  capital ;  of  circulating  capital ;  of  technical  skill ; 
of  materials.  Subsidiary  industries  may  be  maintained  by 
large  concerns. 


Production  of  Wealth  :   Supply.  37 

(2)  On  the  commercial  side.     The  large  producer  buys 
cheaply,  gets  favorable  transportation  rates,    handles  freight 
cheaply,  saves  in  selling  expenses  and  advertising,    often  gets 
trade  through  a  wide  spread  reputation. 

(3)  On  the  side  of  general  policy.     The  large  producer 
can  study  markets,   fashions,  trade  tendencies,   development 
of  localities. 

(4)  Size  itself  gives  power  in  the  competitive  struggle. 

c.  Advantages  of  the  small  producer: 

(1)  On  the  manufacturing  side.     In  some  trades  a  small 
factory  has  all   possible  efficiency  coming  from  specialized 
machinery  and  division  of  labor.     The  owner  can  watch  all 
processes  carefully  and  prevent  waste  of  labor  and  material. 
Subsidiary  industries  help  the  small  producer  while  trade  jour- 
nals spread  knowledge. 

(2)  On  the  commercial  side.     His  advantages  here  are 
partly  compensated  for  by  alliance  with  expert  jobbing  and 
wholesale  houses.     In  lines  in  which  taste  and  individuality 
are  desired  the  small  producer  has,  at  least,  an  even  chance. 

d.  The  actual  result  in  any  line  of  business  depends  upon 
the  relative  importance  therein  of  the  above  considerations. 
Examples  will  easily  suggest  themselves. 

Marshall,  Principles,  Bk.  IV.,  ch.  11;  Economics  of  In- 
dustry, Bk.  IV.,  ch.  11;  Hobson,  Evolution  of  Modern 
Capitalism,  pp.  81-121 ;  Seager,  Introduction,  pp.  149-152 ;  Seager, 
Economics,  |  56 ;  Bullock,  Introduction,  pp.  170-178 ;  Seligman, 
Principles,  §§  143-145 ;  Gide,  Principles,  pp.  161-172  ;  Mill, 
Principles,  Bk.  I.,  ch.  9,  §§1,3,  4;  Nicholson,  Principles,  Bk. 
I.,  chs.  8,  9;  Elements,  Bk.  I.,  chs.  4,  5;  Twelfth  Census  of  the 
United  States,  1900,  VII.,  pp.  Ixxii-lxxv. 

Business  Management. 

a.  There  is  a  distinct  economic  function  of  management. 
The  entrepreneur  or  undertaker  of  business  establishes  the 
business  ;  brings  together  and  organizes  labor,  capital  and 
natural  resources  ;  assumes  the  risks ;  gets  the  profits.  Even 


38  Production  of  Wealth :  Supply. 

though  he  works  with    his   hands  and  owns  the  capital,  the 
function  of  management  is  distinct. 

b.  The  successful   entrepreneur  must    have  knowledge  of 
his  trade,  its  materials,  processes,  machines,  market  tenden- 
cies.    He  must  be  able  to  select,  organize  and  control  labor 
of  all  grades  without  friction.    He  must  have  financial  ability, 
foresight,  caution,  decision  and  energy. 

c.  The  forms  of  management  are 

(1)  Individual  ownership.     This  secures  unity  of  purpose 
and    direction  ;  but    in    typical  modern  industries  one  indi- 
vidual rarely  possesses  the  varied  talents  necessary  for  success, 
frequently  lacks  capital,  and  may  not  care  to  risk  all  in  one 
line. 

(2)  The  partnership  increases  capital  and  combines  varied 
abilities.     It  sometimes  means  friction,  divided  policy  and 
indecision. 

(3)  The  corporation  or  joint-stock  company  ensures  large 
capital,   continuity  of  existence,   limited  liability,   publicity 
when  desirable,  utilization  of  small  capitals,  and  diversion  of 
capital    into   competent  hands.     There  is  often  lack  of  per- 
sonal interest  on  part  of  managers,  and  stockholders  may  be 
defrauded  by  those  in  control. 

(4)  Co-operation,  or  managing  ownership  by  workers  or 
consumers,  means   direct  personal   interest ;  but   lacks  great 
managing  ability  and  involves  friction  and  divided  responsi- 
bility. 

(5)  Public  ownership  is  another  form  of  management. 

d.  Sharp   competition    is   continually   eliminating    those 
methods  of  management  and  persons  that  have  not  ability, 
and,  on  the  other  hand,  bringing  needed  capital  to  those  who 
show  success.     There  is  a  response  of  business  ability  to  the 
demand  for  it. 


Production  of  Wealth  :   Supply.  39 

Marshall,  Principles,  Bk.  IV.,  ch.  12;  Economics  of  Industry, 
Bk.  IV.,  ch.  12;  Bullock,  Introduction,  §§90,91;  Seligman, 
Principles,  §  41 ;  Seager,  Principles,  §§  82-84  ;  Seager,  Econo- 
mics, §§  53-55  ;  Fetter,  Principles,  ch.  29,  ch.  30,  §  1  ;  Andrews, 
Institutes,  §  46;  Nicholson,  Principles,  Bk.  I.,  ch.  8,  §  4 ; 
Twelfth  Census  of  the  United  States,  1900,  VII.,  pp.  Ixvi-lxviii. 

Required  Reading :  Bullock,  Selected  Readings  in 
Economics,  pp.  184  i<?2,  being  an  extract  from  a 
Report  of  the  Twelfth  Census. 

F.     FUTURE  OF  PRODUCTION. 

The  efficiency  of  wealth  production  in  the  tuture  depends 
upon  the  combined  influence  of  all  the  factors  considered  in 
this  chapter.  The  law  of  diminishing  returns,  exhaustion  of 
natural  resources  and  anything  that  affects  unfavorably  the 
efficiency  of  the  worker  or  the  accumulation  of  capital,  are 
unfavorable.  Increasing  efficiency  of  the  worker  ;  growing 
wealth ;  invention  ;  application  of  science  to  agriculture,  in- 
dustry and  transportation  ;  more  efficient  organization  possi- 
ble with  larger  population,  etc.,  etc.,  are  favorable  to  increas- 
ing per  capita  production. 

Marshall,  Principles,  Bk.  IV.,  ch.  13  ;  Economics  of  Industry, 
Bk.  IV.,  ch.  13  ;  Fetter,  Principles,  pp.  558-563  ;  Mill,  Principles, 
Bk.  IV.,  ch.  1;  Nicholson,  Principles,  Bk.  I.,  ch.  10,  §  5,  ch.  11, 
§4. 

Required  Readings  :  Bullock,  Selected  Readings  in 
Economics,  pp.  193-235 ;  Taussig,  The  Iron  Indus- 
try in  the  United  States  ;  and  Helm,  An  International 
Survey  of  the  Cotton  Industry. 


CHAPTER  VI. 

EXCHANGE.     BALANCING  OF  DEMAND  AND 
SUPPLY.      VALUE. 

I .    Development  and  Advantage  of  Exchange. 

a.  Exchange  has  been  a  gradual  development  increasing 
with  the  change  from  a  self-sufficing  to  a  capitalist  economy. 
It  has  been  encouraged  and  shaped  by  natural  transportation 
routes;  and  is  both  a  result  and  a  cause  of  modern  efficiency 
of  transportation. 

b.  Exchange  makes  it  possible  ''to  utilize  wealth  which 
would  remain    unused";    it  increases    utility;    it    increases 
productivity  by  allowing  specialization  ;  it  generally  benefits 
both  parties. 

Bullock,  Introduction,  £§  104,  105;  Gide,  Principles,  pp.  184- 

Prii 


186;  197-200;  Andrews,  Institutes,  §§  51.  52,  53;  Fetter,  Princi- 
ples, pp.  30-31;  Nicholson,  Principles,  Bk.  III.,  ch.  1,  §§  3-6; 
Ely,  Outlines  (1908),  pp.  158,  159;  Pierson,  Principles,  pp.  67-72. 

2.    Markets. 


a.  Market  formerly  meant  a  place  of  sale.     It  now  means 
those  ' '  buyers  and  sellers  who  are  in  such  free  intercourse  with 
one  another  that  the  prices  of  the  same  goods  tend  to  equality 
easily  and  quickly."      (Cournot.) 

b.  Markets  are  continually  widened  by  rapid  and  cheap 
transportation  and  communication.     That  a  commodity  may 
have  a  very  wide  market,  it  must  be  large  in  amount,  exten- 
sively desired,  portable,  and  capable  of  grading  and  exact 
description. 

Marshall,  Principles,  Bk.  V.,  ch.  1;  Economics  of  Industry,  Bk. 
V.,  ch.  1;  Bullock,  Introduction,  §  108;  Fetter,  Principles,  pp. 
36,37;  Seligman,  Principles,  p.  223;  Nicholson,  Principles,  Bk. 
III.,  ch.  3;  Elements,  pp.  217-219;  Hadley,  Economics,  §  88; 
Flux,  Economic  Principles,  ch.  3. 


Value.  41 

Required  Reading  :  Bullock ,  Selected  Readings  in 
Economics,  pp.  325-340,  Defoe's  accounts  of  a  Fair 
and  a  Market  in  the  Eighteenth  Century,  and  an 
official  description  of  the  grain  trade  in  the  United 
States  at  present. 

3.    General  Considerations  Upon  Value. 

a.  A  prominent  central  fact  in  modern  economic  life  is 
exchange  of  goods.     Such  exchange  is  conditioned  upon  a 
valuation  accepted  by  buyer  and  seller.     How  is  this  value 
determined  in  the  market  of  the  moment  ?     Since  such  values 
are   frequently   obviously  temporary,  how  are  more  natural 
values  determined  ?     How  are  the  departures  of  market  from 
normal  values  to  be  explained?     What  effect  may  monopoly 
have  on  value  ?     How  are  such  values  related  to  wages,  inter- 
est, profit  and  rent?     Such  are  fundamentally  the  problems 
of  value. 

b.  Nature  does  not  produce  in  unlimited  quantities  the 
commodities  we  desire.     To  secure  them  requires  labor  or 
sacrifice.     To  secure  greater  and  greater  quantities  (which  to 
the  individual  have  diminishing  utility)  requires  more  labor, 
which    becomes    irksome.     Diminishing    pleasure   costs    in- 
creasing pain.     When  the  utility  is  equaled  by  the  disutility, 
one  stops  effort  to  secure  it.    To  the^individual,  marginal  cost 
equals  marginal  utility. 

c.  As  value   is  determined  by  social  marginal  utility  (see 
ch.  4,  2,  f)  so  it  is  determined  by  social  cost — not  individual 
cost.     Varying  estimates  of  utility  give  the  individual  a  sur- 
plus of  total  utility  above  total  cost.     This  surplus  does  not 
affect  value ;  nor  does  the  fact  that  a  thing  might  cost  a  cer- 
tain  individual   more   than  the   social   cost  affect  its  value. 
Value  is  a  social  problem. 

d.  Utility  determines  value ;  cost  determines  value  ;  but 
neither  alone  determines  value.      "  We  cannot  speak  of  mar- 


42  Value. 

ginal    utility  without    implying    cost ;   \ve    cannot   speak    of 
marginal  cost  without  implying  utility."      (Seligman). 

e.  Progress  in  civilization  depends  upon  increasing  the 
surplus  of  utility  above  cost,  upon  the  just  distribution  of  this 
surplus,  and  upon  its  wise  consumption. 

f.  Value   being   the   ratio    between    the  things  valued,  a 
general  rise  or  fall  of  values  is  impossible,  but  a  general  rise 
or  fall  of  prices  is  constantly  taking  place. 

g.  In  studying  the  causes  of  market  value  and  of  normal 
value   acute   competition  is   assumed  to  exist — as  it  usually 
does  in  wholesale  markets.     In  section  6  of  this  chapter  some 
of  the   forces    modifying   competition  in  retail  markets  are 
mentioned. 

Seligman,  Principles,  ch.  13;  Seager,  Introduction ,  %%  47-53; 
Marshall,  Principles,  Bk.  III.,  ch.  6  ;  Bk.  IV.,  ch.  1  ;  Bk  V.,  ch. 
2,  §  1,  ch.  3,  §  7  ;  Economics  of  Industry,  Bk.  III.,  ch.  6;  Bk.V., 
ch.  2.  §  1,  ch.  3,  §  7  ;  Fetter,  Principles,  ch.  4  ;  ch.  24;  §  3;  Gide, 
Principles,  pp.  49-64 ;  Clark,  Philosophy  of  Wealih,  ch.  5  ;  Nichol- 
son, Principles,  Bk.  III.,  ch.  2;  Bullock,  Introduction,  §  95; 
Smart,  Introduction  to  Theory  of  Value,  ch.  8-9. 

4.    Market  Value.    Temporary  Balancing  of  Demand  and  Supply. 

a.  Buyers   are   influenced   by  the  urgency  of  their  needs 
(demand  schedules),  by  the  amount  of  money  available  (mar- 
ginal utility  of  money),  by  their  estimates  of  the  course  of 
prices  in  the  immediate  future.     Sellers  are  influenced  by  the 
urgency  of  their  need  of  money,  by  the  amount  of  their  stock, 
by  their  estimates  of  future  prices. 

b.  If  there  are  one  buyer  and  one  seller,  there  is  no  sale 
unless  buyer's  maximum  equals  seller's  minimum.     If  it  is 
higher,  then  price  will  be  fixed  between  these  limits  accord- 
ing to  relative  skill  in  bargaining. 

c.  If  there  are  several  buyers  and   one  seller,  the  most 
eager  buyer  will  get  the  article  if  he  meets  the  seller's  mini- 


Value.  43 

mum  ;    if  there  are  several  units,  each  may  be  sold  separately 
or  a  price  may  be  fixed  just  sufficient  to  sell  all. 

d.  If  there  are  several  sellers  and  one  buyer,  competition 
will  enable  the  buyer  to  get  the  article  at  the  minimum  of  the 
most  eager  seller,  or  at  a  price  just  below  the  minimum  of  the 
next  most  eager  seller,  or  somewhere  between  these  two. 

<?.  The  most  typical  case  is  that  of  several  buyers  and 
several  sellers.  Here,  as  in  preceding  cases,  the  essential 
fact  is  not  the  number  of  persons  who  buy  and  sell  (as  im- 
plied in  some  textbooks),  but  the  quantities  offered  and  taken. 
Sellers  compete  as  a  class  with  buyers  as  a  class,  but  further 
each  seller  competes  with  other  sellers  and  each  buyer 
with  other  buyers.  If  the  lowest  price  of  the  most  eager 
seller  is  higher  than  the  highest  price  of  the  most  eager 
buyer,  there  will  be  no  sale.  At  a  price  which  may  be  called 
the  equilibrium  price  the  same  quantity  will  be  offered  and 
taken,  and  equilibrium  will  be  established ;  for  at  a  higher 
price  more  will  be  offered  than  buyers  will  take,  and  com- 
petition among  sellers  will  reduce  the  price,  each  reduction 
decreasing  amount  offered  and  increasing  amount  taken. 
Should  price  fall  below  equilibrium  price  conditions  are 
reversed. 

/.  "  Under  free  competition  there  can  be  at  a  given  time 
and  place  only  a  single  price  for  the  same  commodity.' '  "In 
case  of  competition  the  market  price  is  always  the  one  at 
which  the  greatest  number  of  exchanges  can  be  effected. ' ' 
(Seligman). 

Seligman,  Principles,  ch.  15;  Seager,  Introduction,  §£  55-58; 
Seager,  Economics,  §§  30-32;  Marshall,  Principles,  Bk.  V.,  ch.  2; 
Economics  of  Industry,  Bk.  V.,  ch.  2;  Bullock,  Introduction, 
^  110-116;  Fetter,  Principles,  ch.  5;  Gide,  Principles,  pp.  186- 
196;  Andrews,  Institutes,  §§  61-64;  Hadley,  Economics,  §§  84-96; 
Nicholson,  Elements,  Bk.  III.,  ch.  2;  Principles,  Bk.  III.,  ch.  4; 
Hobson,  Economics  of  Distribution,  ch.  1;  Smart,  Introduction  to 
the  Study  of  Value,  chs.  10,  11;  Pierson,  Principles,  pp.  72-75; 
Davenport,  Outlines,  ch.  4. 


44  Value. 

5.    Normal  Value.    Balancing    of   Normal   Demand  and    Normal 

Supply. 

a.  Normal  value  or  price  "  is  the  price  which,  apart  from 
exceptional  conditions,  is  expected  to  prevail,  and  to  which 
actual  prices  seem  constantly  striving  to  adjust  themselves. ' ' 
(Fetter). 

b.  Real  cost  of  production  consists  of  the  efforts  and  sac- 
rifices necessary  to  production.    The  money  that  must  be  paid 
to  call  forth  these  efforts  and  sacrifices  is  the  money  cost  or 
expenses  of  production.     Cost  of  production  means  socially 
necessary  cost  of  re-production. 

c.  Expenses  of  production  consisting  of  prices  of  mater- 
ials, wages,  interest,  wear  and  tear,  earnings  of  management, 
etc.,  constitute  the  supply  price  "required  to  call  forth  the 
exertion  necessary  for  producing  any  given  amount  of  a  com- 
modity. ' '     (Marshall) .     By  the  Principle  of  Substitution  pro- 
ducers are  continually  trying  to  substitute  a  less  expensive 
method  of  securing  certain  results  for  that  in  use. 

d.  At  a  given  time  cost  of  production  is  "the  marginal 
cost  of  production  ;  that  is,  it  is  the  cost  of  production  of 
those  goods  which  are  on  the  margin  of  not  being  produced 
at  all,  and  which  would  not  be  produced  if  the  price  to  be 
got  for  them  were  expected  to  be  at  all  lower."      (Marshall.) 

e.  "  While  the  normal  value  is  at  any  given  moment  at  the 
point  of  maximum  cost,  it  is  under  a  condition  of  progress 
continually    moving   in    the    direction    of  minimum  cost." 
(Seligman). 

/.  When  the  demand  price  is  greater  than  the  cost  of  pro- 
duction, the  attempt  of  sellers  to  reap  resulting  profits  leads 
to  an  increased  supply  which  can,  however,  find  a  market, 
other  things  being  equal,  only  at  a  lower  price.  When  price 
is  below  cost  of  production,  conditions  are  reversed.  In 
either  case  price  tends  to  equal  marginal  cost  of  production. 


Value.  45 

"When  we  say  that  price  is  fixed  by  the  cost  of  production, 
we  really  mean  that  it  is  fixed  at  the  cost  of  production." 
(Seligman). 

g.  The  longer  the  period  of  adjustment  as  compared  with 
the  length  of  the  period  of  production  of  a  commodity,  the 
more  closely  will  price  approach  cost  of  production.  But  in 
actual  life  equilibrium  is  rarely  attained,  since  in  a  progressive 
society  cost  of  production  constantly  changes. 

h.  In  general  it  may  be  said  that  both  market  and  nor- 
mal values  are  determined  "  by  demand  and  supply,  but  in  the 
case  of  reproducible  goods  the  permanent  equilibrium  between 
demand  and  supply  tends  to  adjust  itself  to  the  cost  of  pro- 
duction." 

/.  In  the  case  of  certain  commodities  increasing  demand 
means  permanently  higher  cost  of  production  ;  in  the  case  of 
others  it  means  constant  cost  ;  and  in  the  case  of  still  others 
it  means  lower  cost.  Normal  values  are  correspondingly  af- 
fected. 

j.  "  Not  only  in  the  case  of  wages  and  interest  but  in  the 
case  of  economic  relations  and  of  concrete  commodities,  re- 
producible as  well  as  non-reproducible,  prices  depend  on  mar- 
ginal efficiency  ' '  which  is  the  universal  explanation  of  value. 

k.  Selling  value  is  a  capitalization  of  estimated  future 
uses. 

.Seligman,  Principles,  %§  103-109,  112-114;  Marshall,  Principles, 
Bk.  V.,  chs.  3,  5;  Economic*  of  Industry ,  Bk.  V.,chs.  3,  5  ;  Bul- 
lock, Introduction,  £§  117-122;  Fetter,  Principles,  ch.  30,  ch.  43, 
£3  ;  Clark,  Philosophy  of  Wealth ,  chs.  5,  6;  Hobson,  Economics  of 
Distribution,  ch.  3;  Nicholson,  Principles,  Bk.  III.,  chs.  4-6  ;  Car- 
ver, Distribution  of  Wealth,  pp.  25-52 ;  Flux,  Economic  Prin- 
ciples, ch.  4;  Pierson,  Principles,  pp.  61  66. 

6.    Influences  that  Hinder  or  Complicate  Determination  of  Value. 

a.  In  studying  value  competition  has  been  assumed  to 
exist.  Anything  that  interferes  with  competition  interferes 


46  Value. 

with  the  ordinary  determination  of  value.     The  following  are 
the  more  important  causes  of  such  interference  : 

(1)  Custom.       This    implies    absence    of    competition. 
There  may  be  competition  in  quality,  however,  even  though 
prices  be  customary. 

(2)  Ignorance.     Competition  is  based  upon  intelligence. 
Misdirected  production  is  the  result  of  ignorance. 

(3)  Lack  of  Freedom. 

(4)  Authoritative  regulation. 

b.  Large  fixed  capital.      Certain  elements  of  cost  change 
proportionately  with  the  quantity  of  product ;  other  elements 
are  more  or  less  independent  of  output.     The  former  may  be 
called  prime,  the  latter  supplementary  costs.     Supplementary 
costs  are  largely  due  to  fixed  capital.     Since  it  is  often  wise 
to  manufacture  for  some  time,  even  if  supplementary  costs  are 
only  partially  or  even   not  at  all  covered,  the  adjustment  of 
of  price  to  total  cost  of  production  may  be  delayed  until  the 
fixed  capital  is  adjusted.     Also,  since  fixed  capital  cannot 
always  be  quickly  supplied,  price  may  remain  above  cost  of 
production  until  capital  is  adjusted.     There  is  here  no  new 
principle — only  delay  ;  but  this  condition  is  one  of  increasing 
practical  importance. 

c.  Rarely  is  the  supply  or  demand  for  an  article  discon- 
nected from  that  of  other  articles. 

(1)  Joint  demand  is  a  demand  for  the  various  factors  nec- 
essary  to  produce  an  article.     One  of  these  joined  factors 
may  have  its  price  much  raised  by  a  check  to  its  supply  if  i* 
is  an  essential   but  relatively   small  part   of  a  much   desired 
commodity,  and  if  the  other  factors  are  elastic  in  demand. 

(2)  Composite  demand  is  a  demand  for  an  article  for  vari- 
ous.uses.     The  working  of  the  laws  of  value  is  in  such  a  case 
sometimes  obscure,  since  a  radical  change  in  the  demand   for 
one  use  may  have  but  slight  effect  on  the  total  demand. 


Value.  47 

(3)  Joint  supply  is  the  supply  of  certain  articles  which  are 
inevitably  common  products  of  a  process.     Some  of  these  are 
called  by-products  and  they  are  of  increasing  practical  impor- 
tance.    In  such  cases  the  cost  is  a  joint  cost  of  the  whole  and 
the  normal  price  of  all  the  parts  together  adjusts  itself  to  the 
joint  cost. 

(4)  Composite  supply  is  the  meeting  of  a  certain  want  by 
several   rival  articles  that  may  be  substituted  for  each  other. 
A  change  in  the  cost  of  production  of  one  may  seriously  affect 
values  of  rival  products. 

Marshall,  Principles  (5th  ed.),  Bk.  V.,  chs.  4,  6,  7;  Economics  of 
Industry,  Bk.  V.,  chs.  4,  6;  Bullock,  Introduction,  §§  123-129; 
Seligman,  Principles,  §  107;  Hadley,  Economics,  §  101;  Andrews, 
Institutes,  §  69;  Mill,  Principles,  Bk.  III.,  ch.  16;  Walker,  Politi- 
cal Economy,  pp.  104-111;  Nicholson,  Principles,  Bk.  III.,  ch.  5, 
§  6;  Twelfth  Census  of  the  United  States,  X.,  pp.  725-748;  Flux, 
Economic  Principles,  pp.  65-69. 

Required  Reading:  Bullock,  Selected  Readings  in 
Economics,  pp.  354-363  on  relation  of  retail  to 
wholesale  prices. 

7.    Monopoly  Value. 

When  monopoly  exists,  value  does  not  tend  to  equal  margi- 
nal cost.  Value  tends  to  be  fixed  at  that  point  which  will 
give  the  greatest  net  returns,  having  due  regard  to  the  effect 
of  this  price  upon  the  volume  of  sales  and  profit  on  the  unit. 


Economics,  §  77;  Fetter,  Principles,  ch.  33,  §  3;  Andrews,  Insti- 
tutes, §  67;  Nicholson,  Principles,  Bk.  III.,  ch.  7;  Elements,  Bk. 
III.,  ch.  4,  §§  3-6,  Flux,  Economic  Principles,  pp.  69-78. 


CHAPTER  VII. 
DISTRIBUTION  OF  WEALTH. 

A.    PRELIMINARY    CONSIDERATIONS. 

I.    The  Problem  of  Distribution. 

Natural  resources,  labor,  capital  and  managing  ability  co- 
operate to  produce  goods  and  their  values.  The  owners  of 
each  of  these  must  be  rewarded  in  order  that  its  aid  may  be 
secured.  How  is  the  value  of  a  good  divided  among  the  co- 
operating agents?  How  are  wages  determined?  Why  do 
they  vary  among  individuals  and  over  periods  of  time? 
What  are  the  normal  tendencies  around  which  market  fluctua- 
tions take  place?  How  are  interest  and  its  differences  deter- 
mined ?  How  are  rent  and  profits  fixed  ?  These  are  questions 
of  function — not  of  individuals,  since  the  same  individual 
may  combine  two  or  three  functions.  This  problem  is  of 
fundamental  economic  and  social  importance. 


Distribution,  ch.  1;  Andrews,  Institutes,  §§  97-99;  Nicholson, 
Principles,  Bk.  II.,  ch.  1,  §§  1,  2;  Elements,  pp.  96-100;  Sidgwick, 
Principles,  Bk.  II.,  ch.  1. 

2.    National  Income  is  the  National  Dividend. 

*'  The  national  dividend  is  at  once  the  aggregate  net  pro- 
duct of,  and  the  sole  source  of  payment  for,  all  the  agents  of 
production  within  the  country  :  ...  It  constitutes  the 
whole  of  them,  and  the  whole  of  it  is  distributed  among 
them,  and  the  larger  it  is,  the  larger,  other  things  being  equal, 
will  be  the  share  of  each  of  them."  These  shares  are  :  wages, 
or  the  remuneration  of  labor ;  interest,  or  the  earnings  or  pro- 
duct of  capital ;  profits,  or  the  income  from  business  enter- 


Distribution  of  Wealth.  49 

prise  ;  rent,  or  the  income  that  accrues  or  is  paid  to  owners 
of  natural  resources  for  the  use  of  them. 

Marshall,  Principles,  Bk.  VI.,  ch.  2,  §  6;  Economics  of  Indus- 
try, Bk.  VI.,  ch.  2,  §  5;  Bullock,  Introduction,  §§  248-250;  Smart, 
Return  to  Protection,  ch.  1. 

3.    All  Incomes  Paid  from  Capital  Goods  but  not  out  of  Capital. 

"  All  but  the  small  part  of  income  which  is  produced  im- 
mediately befores  it  is  consumed  comes  .  .  .  from  the  products 
of  previous  days'  industry  stored  up  as  capital  goods."  But 
since  a  part  of  the  product  is  constantly  replacing  these  capi- 
tal goods  the  fund  of  capital  is  kept  intact. 

Seager,  Introduction,  §§  89,  93. 

Required  Reading,  Bullock,  Selected  Readings  in 
Economics,  pp.  513-532;  Tausstg,  Present  Work 
and  Present  Wages* 

4.    Normal  Static  Laws  Underlie  Dynamic  Conditions. 

In  actual  economic  life-,  especially  in  modern  industrial 
countries,  constant  changes  are  taking  place  which  disturb 
the  equilibrium  that  competition  would  tend  to  establish. 
Population  increases  as  does  capital ;  skill  of  labor  and  effi- 
ciency of  capital  goods  improve  ;  methods  of  agriculture,  man- 
ufactures, trade  constantly  progress ;  climate  is  variable ;  and 
consumption  is  constantly  changing.  Further,  competition  is 
far  from  perfect  because  of  monopoly,  ignorance,  immobility. 
Consequently  changes  in  the  shares  in  the  Distribution  of  the 
National  Dividend  are  constant ;  but  there  are  working  under- 
neath these  changes  tendencies  which  in  an  unchanging  so- 
ciety would  result  in  normal,  static  distribution. 

B.    NORMAL  DISTRIBUTION. 

I.    Hypothetical  Static  Society. 

Imagine  a  society  like  our  own  except  free  from  change  in 
amount  of  capital,  in  method,  in  skill,  in  fertility,  in  habits  of 


50  Distribution  of  Wealth. 

consumption ;  and  one  in  which  competition  is  free  and  uni- 
versal. Capital  goods  would  be  exactly  replaced,  prices 
would  be  normal  and  "  the  net  product  and  the  real  income 
of  consumable  goods  would  be  identical.  .  .  .  Real  in- 
comes will  consist  in  such  a  society  of  the  net  product,  .... 
the  services  of  capital  being  to  enable  those  who  take  part  in 
production  to  secure  at  once  in  consumable  form  the  equiva- 
lent of  what  they  produce."  (Seager).  Unreal  as  such  a 
society  is,  it  is  enough  like  the  actual  so  that  ' '  we  may  say 
that  real  incomes  come  virtually  from  the  net  products  of 
industry. ' ' 

Seager,  Introduction,  §§  92,  93;  Clark,  Distribution,  ch.  25; 
Marshall,  Principles,  Bk.  VI.,  ch.  1,  §£  2-5;  Economics  of  Industry , 
Bk.  VI.,  ch.  1. 

2.  Profits  in  a  Static,  Perfectly  Competitive  Society. 

In  such  a  society  profits,  except  as  equivalent  to  the  wages 
necessary  to  secure  management,  would  disappear,  since  all 
gains  due  to  change  and  fortuitous  conditions  would  be  absent 
and  competition  would  prevent  any  individual  getting,  for 
any  length  of  time,  more  than  that  fair  reward  for  actual  effort 
which  another  might  get. 

Seligman,  Principles,  pp.  354-356;  Seager,  Introduction,  §  99; 
Carver,  Distribution,  pp.  286,  287;  Clark,  Distribution  pp.  70, 
111,  112,  179,  290,  291,  405,  410,  411. 

3.  Wages  in  a  Static,  Perfectly  Competitive  Society. 

In  such  a  society  wages  would  equal  final  productivity  of 
labor  (marginal  productivity)  of  the  particular  grade,  since 
6<  if  there  is  free  competition  and  if  all  the  laborers  do  their 
allotted  tasks  equally  well,  the  share  of  the  product  ascribable 
to  any  of  the  workmen  must  be  equal  to  the  additions  made 
by  the  last,  or  marginal,  laborer  actually  at  work."  (Selig- 
man). "  Each  individual  laborer  gets  as  wages  approximately 
the  equivalent  of  the  amount  which  he  individually  can  add 


Distribution  of  Wealth.  5 1 

to  the  product  of  the  group  to  which  he  belongs."  (Carver). 
Marginal,  productivity  itself,  however,  depends  upon  numbers. 
Where  will  this  margin  be  located  ?  Assuming  what  would 
quite  certainly  be  true,  that  in  such  a  society  a  certain  stand- 
ard of  living  will  be  held  quite  tenaciously  through  an  accelera- 
tion or  retardation  of  the  marriage  and  birth  rate  ;  and  recog- 
nizing that  the  cost  of  producing  a  certain  efficient  supply  of 
labor  is  equal  to  this  standard,  it  may  be  said  that  the  normal 
tendency  of  wages  is  to  equal  the  cost  of  securing  or  producing 
labor. 

Marshall,  Principles,  Bk.  VI.,  ch.  1,  §§  3-8,  10;  ch.  2,  §§  1-3; 
Economics  of  Industry,  Bk.  VI.,  ch.  1,  £§  2-6,  8;  ch.  2,  §§' 1,  2; 
Seligman,  Principles,  §  175;  Flux,  Economic  Principles,  pp.  118- 
135;  Carver,  Distribution,  pp.  135-158;  Clark,  Distribution,  chs. 
7,  8;  Fetter,  Principles,  ch.  23,  §  3;  Gide,  Principles,  pp.  509-514. 

4.    interest  in  a  Static,  Perfectly  Competitive  Society. 

In  such  a  society  interest  would  equal  the  final  productivity 
of  a  unit  of  capital,  since  each  "  will  push  the  investment  of 
capital  in  his  business  in  each  several  direction  until  what  ap- 
pears in  his  judgment  to  be  the  margin  of  profitableness  is 
reached."  (Marshall).  Were  there  perfect  mobility  of  capi- 
tal, the  marginal  productivity  of  capital  in  all  trades  would  be 
the  same  because  of  the  immediate  transfer  of  marginal  capi- 
tal from  less  to  more  productive  uses.  Marginal  productivity 
itself,  however,  depends  upon  the  amount  of  capital.  Were 
capital  unlimited,  there  could  be  no  interest.  Where  will 
this  margin  be  located?  Obviously  at  that  point  where  the 
marginal  productivity  (or  interest)  is  a  sufficient  reward  to 
induce  people  to  save  that  amount  which  will  have  this  mar- 
ginal productivity.  That  is,  interest  is  fixed  at  that  point 
which  covers  that  which  may  be  called  a  metaphysical  cost  of 
producing  capital.  Each  piece  of  capital  goods  must  as  a 
rule  produce  not  only  enough  for  its  own  replacement,  but 
also  an  amount  sufficient  to  induce  that  social  abstinence  or 
forbearance  which  results  in  capital.  Much  saving  is  not 


52  Distribution  of  Wealth. 

under  the  incentive  of  interest,  but  marginal  saving  is.  Inter- 
est tends  to  be  fixed  by  a  balancing  of  productivity  and  reward 
of  forbearance  —  by  demand  and  supply. 

Marshall,  Principles,  Bk.  VI.,  ch.  1,  §  9;  ch.  2,  §  4;  Economics 
of  Industry,  Bk.  VI.,  ch.  1,  §  7  ;  ch.  2,  §  3  ;  Seligman,  Principles, 
§§167,  168  ;  Carver,  Distribution,  pp.  220-256;  Clark,  Distribution, 
ch.  12;  Gide,  Principles,  pp.  573-577. 

5.    Division  of  the  Whole  Product  in  Such  a  Society. 

In  such  a  society  since  capital  and  labor  not  only  co-operate, 
but  compete  ;  and  since  marginal  quantities  of  either  are 
readily  substituted  for  marginal  quantities  of  the  other  when 
more  efficient  in  proportion  to  cost,  their  marginal  prices  are 
relative  to  their  efficiencies.  "The  law  which  determines 
the  division  of  the  product  between  labor  and  capital  in  com- 
petitive industries  for  a  society  in  a  state  of  normal  equilibrium 
is,  therefore,  that  each  receives  the  share  that  it  produces." 
(Seager). 

Seager,  Introduction,  §§149,  150  ;  Marshall,  Principles,  Bk.VI., 
.  1, 
Clark, 


ch.  1,  §§6,  7,  8;  Economics  of  Industry,  Bk.VI.,  ch.  1,  §§6,  7,8; 
ark,  Distribution,  chs.  11,  12. 


6.    Summary  of  Normal,   Static   Distribution. 

The  same  tendencies  hold  for  the  prices  of  productive  fac- 
tors as  for  the  prices  of  commodities,  that  is,  wages  and  in- 
terest tend  to  equal  marginal  productivity  ;  but  wages  and  in- 
terest in  a  static  society  would  have  a  close  relation  to  cost  of 
securing  the  supply  of  labor  and  of  capital.  "  Supply  price 
and  demand  price  tend  to  be  equal  :  wages  [and  interest]  are 
not  governed  by  demand  price  nor  by  supply  price,  but  by 
the  whole  set  of  causes  which  govern  demand  and  supply.  '  ' 
(Marshall).  The  "  National  Dividend  is  at  once  the  aggre- 
gate net  product  of,  and  the  sole  source  of  payment  for,  all 
the  agents  of  production  within  the  country  ;  .  the 

larger  it   is,  the  larger,  other  things  being  equal  will  be  the 
share  of  each  of  them."     An  increase  in  the  amount  of  any 


Distribution  of  Wealth.  53 

one  agent  will  be  an  advantage  to  all  by  increasing  the  na- 
tional dividend  ;  but  may  be  disadvantageous  to  the  particular 
agent,  since  the  lowering  of  its  marginal  productivity  may 
more  than  offset  its  share  of  the  increased  total  production. 

Marshall,  Principles,  Bk.  VI.,  ch.  2,  §§6-10;  ch.  11;  Economics 
of  Industry,  Bk.  VI.,  ch.  2,  §§  5-10;  ch.  11. 

C.  PROFITS.  CONDITIONS  WHICH  PREVENT 
THE  REALIZATION  OF  STATIC  CONDI- 
TIONS AND  NORMAL,  DISTRIBUTION. 

I.    Changes  in  Economic  Conditions, 

a.  The  hypothetical  results  described  under  "B"  are  con- 
ditioned upon  the  attainment  and  maintenance  of  equilibrium. 
In  actual  life  there  are  constant  changes  taking  place,  some 
gradual,  some  radical,  which  prevent  such  equilibrium,  so  that 
actual  distribution  only  tends  toward  the  method  described. 
Such  changes  are  increases  in  population  and  in  capital ;  im- 
provement in  skill  of  labor  and  the  efficiency  of  capital  goods  ; 
better  organization  of  labor  and  capital  ;  changes  in  habits  of 
consumption  ;  variability  in  climate  and  season  ;  and  exhaus- 
tion of  natural  resources. 

b.  There  result  changes   in   prices  which  make  market 
prices  higher  or  lower  than  the  normal  prices  composed  of 
wages  and  interest.     Hence  appear,  even  under  sharply  com- 
petitive conditions,  entrepreneur' s  gains  or  losses.    Such  gains 
are  profits  in  the  strict  sense  and  continue  a  long  or  short 
time  according  as  competition  can  quickly  or  slowly  restore 
normal  conditions. 

Seager,  Introduction,  pp.  169-173;  177-187;  Seager,  Economics, 
ch.  8;  Marshall,  Principles,  Bk.  VI.,  ch.  7,  §1;  ch.  8,  §§6-8; 
Economics  of  Industry,  Bk.  VI.,  ch.  7,  §  1;  ch.  8,  §§  5,  6;  Selig- 
man,  Principles,  £§  152,  153;  Carver,  Distribution,  pp.  268-278; 
Bullock,  Introduction,  §  291;  Clark,  Distribution,  chs.  5,  25;  Sidg- 
wick,  Principles,  Bk.  II.,  ch.  2. 


54  Distribution  of  Wealth. 

2.     Monopolistic  Conditions. 

a.  Normal  distribution  depends  upon  the  existence  of  com- 
petition.    Since  competition  is  frequently  restricted  by  com- 
bination, some  prices  are  determined  in  accordance  with  the 
law  of  monopoly  value  above  normal  value.     Hence  result 
monopoly  profits. 

b.  These  monopoly  profits,  so  far  as  they  are  due  to  prices 
higher  than  those  which  would  prevail  without  monopoly, 
affect  cost  of  living  and  diminish  the  real  incomes  of  other 
factors  of  production. 

Seager,    Introduction,  §§  109-113;    Seager,   Economics,  ch.   9; 
Seligman,  Principles,  §  156;  Bullock,  Introduction,  §  292. 

D.    WAGES. 

I.  Definitions  and  Discriminations. 

a.  "  Wages  include  all  earnings  assigned  to  men  for  their 
work  from  lowest  piece  wages  to  highest  annual  salaries  and 
'wages  of  management.'         They  also  include    the   return 
which  comes  directly  to  a  man  for  his  labor. 

b.  Time  wages  are  paid  for  a  quantity  of  time.     Piece 
wages  are  paid  for  a  quantity  of  result.     The  term  efficiency 
wages  may  be  used  to  describe  "earnings  measured — by  the 
exertion  of  ability  and  efficiency  required  of  the  laborer." 
The  relative  advantages  and  disadvantages  of  time  and  piece 
wages  depend  upon  the  conditions  of  the  particular  trade, 
factory  or  job.     The  labor-cost  under  each  tends  to  be  the 
same.     Efficiency  wages  tend  to  be  equal  in  the  same  district 
unless  much  expensive  machinery  is  used. 

c.  ' '  Real  wages  of  labor  may  be  said  to  consist  in  the 
quantity  of  the  necessaries  and  conveniences  of  life  that  are 
given   for  it;  its   nominal  wages  in  the  quantity  of  money." 
Real  wages  depend  upon  the  nominal  wages  as  modified   by 
changes  in  the  value  of  money,  trade  expenses,  allowances, 


Distribution  of  Wealth.  55 

privileges,  supplementary  earnings,  regularity  of  employment, 
certainty  of  success. 

Marshall,  Principles,  Bk.  VI.,  ch.  3;  Economics  of  Industry,  Bk. 
VI.,  ch.  3;  Bullock,  Introduction,  §£  277-279;  Seager,  Introduc- 
tion, £  135;  Fetter,  Principles,  ch.  23,  §§  1,  2;  Andrews,  Insti- 
tutes, $  113. 

2.    Industrial  Grades. 

There  are  infinite  variations  of  efficiency  from  that  of  the 
most  worthless  of  the  "residuum"  up  to  that  of  the  ablest 
<{  captains  of  industry."  For  convenience  five  classes  may 
be  recognized :  unusual  managing,  artistic  and  professional 
ability ;  ordinary  business,  artistic  and  professional  ability, 
and  highly  skilled  mechanical  ability ;  ordinary  mechanical 
and  clerical  ability  ;  unskilled  manual  labor  ;  the  inefficient. 
Throughout  history  and  over  a  great  part  of  the  world  at 
present  each  grade  has  been  recruited  largely  from  its  own 
children.  In  modern  industrial  democratic  countries  and 
especially  the  United  States  this  is  not  so  true ;  but  it  is  de- 
batable whether  movement  from  grade  to  grade  is  now  as 
easy  as  in  our  earlier  history. 

Seager,  Introduction,  §§  131,  138;  Marshall,  Principles,  Bk.  IV., 
ch.  6;  Economics  of  Industry,  Bk.  IV.,  ch.  6,  §  5. 

3.    Demand  and  Supply  Determine  the  Wages  of  These  "  Non- 
Competing  Groups." 

Transition  from  one  grade  to  another  being  difficult  and 
slow,  wages  are  determined  by  the  demand  for  and  supply  of 
labor  of  each  grade.  These  grades  cannot  easily  compete 
with  each  other.  Thus  are  explained  alike  the  wages  of  a 
great  corporation  president  and  of  a  laborer  displaced  by  a 
machine.  In  all  cases  the  ultimate  cause  is  the  'demand  of  the 
consuming  public.  Competition  and  substitution  tend  to  ad- 
just rewards  to  efficiency,  working,  as  Professor  Marshall  says, 
through  the  independent  business  manager  in  the  case  of  wages 


56  Distribution  of  Wealth. 

of  employees  and  on  him  so   far  as  his  own  wage-income  is 
concerned. 

Seager,  Introduction,  pp.  228,  240;  Bullock,  Introduction,  §  286; 
Cairnes,  Leading  Principles,  pp.  57-73. 

4.    Causes  of  Differences  in  Real  Wages. 

Competition  moving  labor  from  less  to  more  productive 
trades,  processes  and  regions,  would  tend  to  produce  equality 
of  wages  were  it  not  for  certain  hindrances  and  peculiarities 
in  the  action  of  demand  and  supply  in  reference  to  labor. 
Such  are  : 

a.  Differences  in  native  ability  which,  with  full  allowance 
for  environmental  influence,  are  most  striking. 

b.  Immobility  of  labor.     In  spite  of  growing  ease  and 
cheapness  of  transportation,  unwillingness  of  laborers  to  leave 
certain  regions  leads  to  relative  over-supply  and  under-supply 
in  certain  districts  and  trades. 

,  c.  The  efficiency  which  enables  men  to  enter  the  more 
highly  paid  trades  depends  largely  upon  the  investment  of 
wealth  in  giving  right  training  ;  but  this  expenditure  must  be 
made  largely  by  those  who  will  not  benefit  by  the  result. 

d.  Labor  is  perishable.     The  laborer  must  sell  his  labor 
at  the  best  price  obtainable  or  lose  it  entirely.     His  urgent 
need  leads  to  bad  bargains. 

e.  Labor  is  at  a  disadvantage  in  bargaining  as  compared 
with  the  employer  in  respect  to  reserve  power,  competitive 
skill  and  knowledge  of  the  market. 

/.  Supplies  of  labor  are  slowly  produced  so  that  a  relative 
deficiency  is  slowly  made  up  and  a  relative  over  supply  slowly 
removed.  This  is  an  effective  cause  of  difference  in  propor- 
tion as  the  period  necessary  for  acquiring  the  requisite  skill  is 
short  or  long. 


Distribution  of  Wealth.  57 

Marshall,  Principles,  Bk.  VI.,  chs.  4,  5;  Economics  of  Industry, 
Bk.  VI.,  chs.  4,  5;  Seager,  Introduction,  §  134;  Seager,  Econom- 
ics, §§  89-94;  Seligman,  Principles,  p.  413;  Bullock,  Introduction, 
§  294;  Pierson,  Principles,  pp.  332-340;  Mill,  Principles,  Bk.  II., 
ch.  14;  Nicholson,  Principles,  Bk.  II.,  ch.  11;  Elements,  Bk.  II., 
ch.  7;  Smith,  »>«#£  of  Nations,  Bk.  I.,  ch.  10. 


5.    Further  Causes  of  Differences  in  Money  Wages. 

Even  when  the  net  advantages  and  disadvantages  of  wages 
in  different  trades  are  the  same,  nominal  differences  may  re- 
sult from  the  following  causes  : 

a.  Cost  of  living.     A  large  money  wage  may  yield   no 
more  than  a  small  one  if  the  expenses  of  living  are  large. 

b.  Cost  of  learning  trade. 

c.  A  trade  may  have  relatively  small  money  wages  because 
of  the  leisure  or  other  attractions  connected  with  it. 

d.  Supplementary  earnings. 

e.  Danger  incurred.     A  high  wage  may  be  partly  com- 
pensation for  risks  involved  in  the  calling. 

/.  Social  esteem.  Social  esteem  or  prejudice  may  account 
for  difference  in  wages. 

g.  A  high  money  wage  for  the  day,  week  or  year  may  not 
involve  high  wages  for  the  entire  life  of  the  worker,  if  work 
be  irregular  or  if  the  length  of  effective  working  life  be  short. 

h.  A  low  nominal  wage  may  be  accounted  for  by  unusual 
chances  for  great  success  or  certain  promotion. 

Seager,  Introduction,  §  136;  Seager,  Economics,  §  95;  Marshall, 
Principles,  Bk.  VI.,  ch.  3,  §§  3-8;  Economics  of  Industry,  Bk.  VI., 
ch.  3,  §§  3,  4;  Bullock,  Introduction,  §287;  Seligman,  Principles, 
§  178;  Carver,  Distribution,  pp.  179-184;  Adam  Smith,  Wealth  of 
Nations,  Bk.  I,  ch.  10. 

Required  Reading,  Bullock,  Selected  Readings  in 
Economics,  pp.  543^563  ;  Adam  Smith  on  Differ- 
ences in  Wages. 


58  Distribution  of  Wealth. 

6.    Reasons   for  the  Continuance   of  Difference  In  Real  Wages. 

a.  Differences  in  marginal  productivity  tend  to  fix  wages. 
These  differences  in  productivity  are  due  to  unequal  abilities 
which  are  the  result  of  all  those  facts  of  heredity  and  environ- 
ment which  affect   efficiency.      In  the  environment  may  be 
emphasized  such  influences  as  home  surroundings  and  standard 
of  living,  length  and  character  of  school  training,  child  labor, 
caste  and  social  prejudice,  and  all  those  influences  considered 
in  chapter  v.,  C.,  3. 

b.  The  continuance  of  a  certain  standard  of  wages  is  large- 
ly due  to  these  wages  which  fix  the  standard  of  living,  which 
in  turn  largely  determine  efficiency  upon  which  productivity 
and,  in  the  long  run,  wages  depend.     Such  is  the  circle  of 
influence. 

Seager,  Introduction^  137,  138 ;  Seager,  Economics,  §§  96-98. 
7.  Influence  of  Wages  on  Supply  of  Labor. 

Wages  in  a  static  society  would  be  determined  by  supply 
as  well  as  by  demand.  Does  the  supply  of  efficient  labor  re- 
spond in  real  life  to  changes  in  demand  as  shown  in  wages  ? 

a.  Increased  remuneration  stimulates  to  increased  exertion. 

b.  Increased  remuneration  stimulates   to  better  prepara- 
tion and  hence  greater  efficiency. 

c.  Increased  wages,  so  far  as  they  improve  the  standard  of 
living,  not  only  increase  efficiency  but  increase  the  number  of 
the  population  surviving  to  productive  age. 

d.  Increased  wages  tend  over  a  great  part  of  the  world  to 
accelerate  marriage  and  to  increase  the  birth  rate,  although  in 
modern  industrial  countries  this  seems  to  be  a  cause  of  fluctu- 
ation about  a  gradually  decreasing  birth  rate  that  has  come 
with  higher  standards  of  material  comfort. 

e.  All   things   considered,    then,    an    increase   in   wages 
above  the  prevailing  standard  of  living  (which  is  in  a  sense 
the  cost  of  production  of  labor)  tends  to  increase  the  supply 


Distribution  of  Wealth.  59 

of  efficient  labor.  This  standard  of  living  is  not,  however,  a 
fixed  minimum  of  existence  but  a  more  or  less  elastic  stand- 
ard held  with  varying  degrees  of  tenacity  by  different  groups 
and  individuals.  Trade  Unionism  tries  to  raise  this  stand- 
ard of  living  and  to  make  it  universal.  It  tends  steadily  up- 
ward largely  because  of  social  action. 


dustry t 

Seager,  Economics,  §§113,  114;  Seligman,  Principles,  §§  174, 
177 ;  Carver,  Distribution,  pp.  164-179 ;  Bullock,  Introduction, 
§  284;  Smart,  Distribution,  Bk.  II.,  chs.  14,  16,  17,  18;  Fetter, 
Principles,  ch.  21 ;  Pierson,  Principles,  pp.  315-331 ;  Webb,  In- 
dustrial Democracy,  pp.  632-643 ;  Ely,  Outlines  (1908)  ch.  22. 

8.    Conclusion  as  to  Wages. 

In  our  actual  dynamic  society  wages  tend  as  in  an  imagin- 
ary static  society  to  be  fixed  by  productivity  and  the  standard 
of  living  ;  but  very  slowly  and  inaccurately.  Since  the  econ- 
omic changes  of  modern  times  are  constantly  following  one 
another,  even  that  adjustment  which  might  be  brought  about 
slowly  is  never  realized.  Many  wages  are  higher  or  lower 
than  our  only  standard  of  justice,  merit,  would  set.  Even 
though  men  are  rewarded  according  to  the  values  they  pro- 
duce, these  values  are,  because  of  social  changes,  variable  and 
even  fickle  in  some  lines  of  production.  Though  the  tendency 
is  for  men  to  be  rewarded  according  to  the  efforts  they  put 
forth  and  according  to  the  skill  they  have  acquired,  they  fre- 
quently are  not.  Here  then  is  the  basis  for  the  charge  that 
our  distribution  involves  social  injustice.  But  these  changes 
"largely  neutralize  one  another  .  .  .  and  cause  the  actual 
form  of  society  to  hover  much  nearer  to  the  theoretical  static 
form  than  would  be  possible  if  these  influences  worked  separ- 
ately." (Clark.)  Further,  it  is  the  profits  resulting  to  entre- 
preneurs from  these  changes  which  are  the  incentive  to  econ- 
omic improvements,  the  results  of  which,  in  the  long  run,  go 
very  largely  to  labor. 


60  Distribution  of  Wealth. 

Clark,  Distribution,  ch.  25;  Marshall,  Principles,  Bk.  VI.,  ch. 
2;  ch.  5,  §§  4-7;  Economics  of  Industry,  Bk.  VI.,  ch.  2;  ch.  5,  §4; 
Seligman,  Principles,  §§  176,  179;  Seager,  Introduction,  §§  155- 
157;  Smart,  Distribution.  Bk.  II.,  entire,  but  especially  chs.  13, 
19,  28. 

9.    Wages  Not  Arbitrary. 

The  departures  of  distribution  from  the  principle  of  reward 
according  to  merit  are  not  due  to  arbitrariness  but  to  general 
social  influences.  Wages  are  social  assessments  of  worth  as 
judged  at  the  time — often  capricious  and  fickle,  but  very 
largely  on  a  sound  basis. 

Smart,  Distribution,  Bk.  II.,  chs.  1-13,  and  especially  ch.  1,  an 
entertaining  piece  of  sound  argument. 

E.    INTEREST. 

I.    Definition  and  Discrimination. 

a.  Interest,  in  form  paid  for  the  use  of  money,  is  really 
paid  for  the  use  of  capital  which  the  money  represents.     In 
Economics  the  term  refers  to  the  earnings  of  capital,  whether 
a  loan  be  involved  or  not. 

b.  The   rate  of  interest  on  ordinary  long  loans  is  not 
affected  by  the  supply  of  money,  but  in  financial  centers,  since 
actual  cash  is  often  needed  to  meet  obligations,  the  rate  of 
interest  on  loans  is  directly  affected  by  supply. 

c.  That  which  seemingly  is  a  high  rate  of  interest  some 
times  conceals  wages  of  management  or  insurance. 

Seligman,  Principles,  pp.  392,  395;  Seager,  Economics,  §§  100, 
101;  Bullock,  Introduction,  pp.  389,  396-398;  Marshall,  Prin- 
ciples, Bk.  VI.,  ch.  6,  §  4;  Economics  of  Industry,  Bk.  VI.,  ch.  6, 
§  2 ;  Fetter,  Principles,  ch.  16 ;  Andrews,  Institutes,  §§  108,  111  ; 
Gide,  Principles,  pp.  568-572 ;  Pierson,  Principles,  pp.  225-232. 

2.    Normal  Tendency  of  Interest  Approximated  in  Actual  Society. 

Since  the  mobility  of  capital  is  much  greater  than  that  of 
labor,  actual  interest  approximates  the  normal  much  more 
closely  than  do  wages.  The  transfer  of  capital  from  less  to 
more  productive  employments  is  brought  about  mainly  by  the 


Distribution  of  Wealth.  61 

direction  of  the  replacement  fund.  Capital  goods  which  do 
not  earn,  in  addition  to  their  replacement  fund,  current  rates 
of  interest  are  not  replaced,  and  the  portion  of  capital  thus  set 
free  is  turned  into  capital  goods  of  the  sort  that  promise  the 
greatest  earnings.  Because  of  this  mobility  of  capital,  there  is 
an  approximation  of  interest  rates  in  different  employments  to 
a  general  rate. 

Seager,  Introduction,  §§  142,  147,  156;  Seager,  Economics ;  §§ 
102,  103;  Carver,  Distribution,  pp.  214-215;  Clark,  Distribution, 
pp.  ch.  18. 

3.    Differences  in  Economic  Interest. 

a.  In  spite  of  this  tendency  toward  a  general  rate  of  inter- 
est, different  capital  goods  are  earning  different  rates  because, 
an   investment   of  capital  once  having  been  made  with  any 
degree  of  specialization  and  permanency,  it  cannot  be  with- 
drawn immediately.     Any  change   in  economic  conditions 
may  make  the  rate  above  or  below  the  current  rate. 

b.  Differences  in  risk  may  also  require  larger  earnings  to 
attract  necessary  capital,  although  this  apparently  higher  rate 
of  interest  is  commonly  a  larger  replacement  fund.     So  social 
disrepute  of  a  trade  may  require  a  higher  rate  of  interest   to 
attract  capital  to  it,  although  such  higher  rate  is  almost  uni- 
versally composed  partly  of  wages  of  management. 

c.  There  are  differences  in  marginal  productivity  of  capi- 
tal in  different  localities  because  of  the  limitation  of  supply 
of  capital  in  certain  regions. 

Seager,  Introduction,  §§  143-145  ;  Seager,  Economics,  §§  104, 
105  ;  Flux,  Economic  Principles,  pp.  90-96. 

4.    Differences  in  Loan  Interest. 

Competition  tends  to  make  a  uniform  rate  of  interest  pre- 
vail in  the  same  loan  market.  So  perfectly  does  competition 
work  that  a  difference  of  rate  on  loans  of  the  same  duration 
is  evidence  of  difference  in  security.  In  addition  to  differ- 


62  Distribution  of  Wealth. 

ences  due  to  risk  there  are  differences  in  loan  rates  in  different 
regions.     The  money  market  is  an  international  one. 

Seager,  Introduction,  §  146  ;  Seligman,  Principles,  §  166 ;  Bul- 
lock, Introduction,  pp.  394-395  ;  Marshall,  Principles,  Bk.  VJ., 
ch.  6,  §§4,  5  ;  Economics  of  Industry,  Bk.  VI.,  ch.  6  ;  Andrews, 
Institutes,  §§  109,  110. 

5.    Tendency  of  Interest. 

a.  With  progress  in  civilization  (which  involves   increase 
of  wealth  and  capital,  not  only  absolutely  but  relatively  to 

t  labor  and  natural  resources)  the  total  product  of  capital  in- 
creases, but  its  marginal  productivity  decreases.  The  rate  of 
interest  tends  downward,  but  the  quantity  and  quality  of  capi- 
tal are  bettered  to  the  advantage  of  the  other  factors  in  pro- 
duction. 

b.  There  is  no  reason  to  think  that  interest  will  fall  to  noth- 
ing, because  ^every  decrease  in  the  rate  increases  demand  for 
capital ;    and  because  every  decrease  in  the  rate  tends  some- 
what to  discourage  saving. 

Seligman,  Principles,  §§  169,  170;  Seager,  Introduction,  §  302  I 
Seager,  Economics,  §  239 ;  Gide,  Principles,  pp.  577-581 ;  Pierson, 
Principles,  pp.  213-217. 

6.    Regulation  of  Interest. 

Interest,  prohibited  in  the  Middle  Ages,  was  at  first  allowed 
in  certain  contingencies  and  then  generally  with  a  limitation 
of  the  rate.  Such  regulation  still  prevails  in  many  American 
states,  but  is  contrary  to  the  general  tendency  toward  econ- 
omic freedom.  It  is  not  only  easily  evaded,  but  tends  actu- 
ally to  increase  the  rate  to  the  necessitous  borrower.  Where 
equality  in  bargaining  does  not  exist,  regulation  seems  to 
have  some  justification. 

Seligman,  Principles,  §  171  ;  Bullock,  Introduction,  §  268  ;  Fet- 
ter, Principles,  p.  135 ;  Hadley,  Economics,  §§  155-157  ;  Andrews, 
Institutes,  §  112. 


Distribution  of  Wealth.  63 

7.    Justification  of  Interest. 

For  varying  reasons  in  different  ages  objection  has  been 
made  to  the  rightfulness  of  interest.  Consideration  of  this 
topic  is  not  within  the  scope  of  this  course,  but  it  should  be 
noted  that  interest  is  now  justified  on  the  ground  of  social 
utility.  The  capital  which  is  essential  to  progress  would  not 
be  accumulated  without  the  incentive  of  interest.  Although 
the  motive  of  saving  is  personal  gain,  the  result  is  general  ad- 
vantage. 

Bullock,  Introduction.  §  268 ;  Seager,  Introduction,  §  299  ; 
Ely,  Outlines  (1908),  pp.  416-426. 

F.    BENT. 

I.    Definition  and  Discrimination. 

Rent  is  the  share  of  income  that  goes  to  the  owner  of  any 
natural  agent.  Economic  rent,  or  the  real  earnings  of  a  natural 
agent,  must  be  distinguished  from  contract  rent,  or  the  sum  that 
one  pays  in  return  for  the  right  to  receive  the  earnings  of  a 
natural  agent.  The  term  rent  is  frequently  extended  to  the 
sum  paid  for  the  use  of  other  things  than  natural  agents. 

Seager,  Introduction,  §  119;  Seager,  Economics,  §  81;  Selig- 
man,  Principles,  §  159;  Fetter,  Principles,  ch.  8;  Nicholson, 
Principles,  Bk.  II.,  ch.  14,  §  1  ;  Elements,  Bk.  II.,  ch.  10,  §  1. 

2.    The  Basis  of  Rent. 

a.  There  would  be  no  rent  were  there  a  superabundance 
of  best  land. 

b.  There  would  be  no  rent  if  unlimited  applications  of 
capital  and  labor  to  land   produced  the  same  proportionate 
return. 

c.  Because  of  the  scarcity  of  best  land  and  because  of  the 
fact  of  diminishing  returns,  the  necessary  food  and  raw  mater- 
ial demanded  by  increasing  population  can  be  secured  only  by 
resort  to  poorer  lands  or  by  less  productive  applications  of 


64  Distribution  of  Wealth. 

labor  and  capital  to  the  best  land.  The  effective  motive  in 
either  case  is  the  higher  price  of  the  produce  of  land  resulting 
from  increasing  demand. 

d.  Since  all  equal  units  of  a  crop  will  have  equal  value  in 
the  same  market,  the  price,  fixed  at  the  marginal  cost  of  pro- 
duction, will  yield  a  surplus  on  that  part  of  the  crop  raised  at 
relatively  greater  advantage.     This  surplus  arising  from  su- 
perior productivity  of  land  above  the  extensive  or  intensive 
margin  or  cultivation  is  economic  rent. 

e .  The  income  of  permanent  improvements  obeys  the  same 
law  as  income  ascribable  to  the  land  itself. 

Seager,  Introduction,  §§  63,  120-122,  127;  Seager,  Economics, 
§§  82,  83;  Bullock,  Introduction,  §§  272,  273;  Seligman,  Principles, 
|  160;  Marshall,  Principles,  Bk.  IV.,  ch.  3;  §§  2-6;  Bk.  VI.,  ch.  9; 
Economics  of  Industry,  Bk.  IV.,  ch.  3,  §§  2-5;  Bk.  VI.,  ch.  9; 
Carver,  Distribution,  pp.  185-202;  Gide,  Principles,  pp.  582-590; 
Davenport,  Outlines,  pp.  75-85;  Pierson,  Principles,  pp.  84-92; 
Flux,  Economic  Principles,  pp.  97-105;  Mill,  Principles,  Bk.  II., 
ch.  16,  §§  1-5;  Nicholson,  Principles,  Bk.  II.,  ch.  14;  Elements, 
Bk.  II.,  ch.  10;  Walker,  Political  Economy,  pp.  193-200;  Ely,  Out- 
lines (1908),  pp.  348-359. 

3.    The  Relation  of  Rent  to  Prices. 

a.  Generally  speaking,  rent  is  the  result  of  price — not 
price  the  result  of  rent. 

b.  In  the  case  of  a  crop  raised  in  part  on  actual  no-rent 
land,  rent  (that  is,  the  disposition  of  the  surplus)  does  not  in- 
crease price,  although  this  surplus,  being  a  part  of  supply, 
helps  fix  the  price. 

c.  "  More  commonly  the  marginal  land  for  any  particular 
use  itself  affords  a  rent  because,  though  marginal  for  the  given 
use,  it  is  above  the  margin  for  some  other  use  to  which  it 
might  be  applied."      (Seager.)     In  such  a  case  the  marginal 
rent  is  an  element  in  price,  but  the  differential  rent  due  to  the 
use  of  better  land  for  this  particular  purpose  does  not  increase 
price. 


Distribution  of  Wealth.  65 

d.  The  intensive  margin  of  cultivation  is  a  no-rent  mar- 
gin.    The  price  of  the  commodity  thus  raised  intensively  is 
not  increased  by  the  payment  of  rent,  but  is  determined  by 
wages  and  interest  at  the  margin. 

e.  Wages  and  interest  are  necessary  to  secure  the  supply 
of  labor  and  capital.     They  are  therefore  necessary  elements 
in  cost  of  production.      "Rent,  however,  is  wholly  a  result 
of  production, ' '  and  not  a  cause. 

Seager,  Introduction,  §  127;  Seligman,  Principles,  §  161;  Bul- 
lock, Introduction,  §  274;  Marshall,  Principles,  Bk.  V.,  ch.  8-11; 
Economics  of  Industry ,  Bk.  V.,  ch.  3,  §  8,  and  Appendix  C;  Car- 
ver, Distribution,  pp.  206-210;  Smart,  Distribution,  ch.  26;  Clark, 
Distribution,  ch.  23;  Pierson,  Principles,  pp.  93-99;  Flux,  Econ- 
omic Principles,  pp.  109-114;  Mill,  Principles,  Bk.  II,,  ch.  16,  §  6; 
Hobson,  Distribution,  ch.  4,  pt.  i.;  Andrews,  Institutes,  §  105; 
Walker,  Political  Economy,  pp.  200-202. 

4.  Rent  of  Water  Power  and  Mines. 

These  rents  are  determined  similarly  to  that  of  land.  In 
the  case  of  water  power  the  marginal  power  used  must  yield 
a  return  large  enough  to  pay  interest  on  the  investment  of 
capital  necessary  for  utilization.  The  rent  of  water-power  is 
constantly  limited  by  the  cost  of  the  possible  substitutes  for 
it. 

In  the  case  of  mines  the  product  does  not  renew  itself. 
Hence  the  marginal  mine  ought  rationally  to  be  one  which 
paid  not  only  working  expenses  but  enough  to  compensate 
for  exhaustion  of  the  deposit.  Practically  on  account  of  the 
speculative  nature  of  most  mining  there  are  no-rent  mines  and 
"  the  rent  of  better  mines  is  measured  up  from  them  as  a  no- 
rent  margin."  (Seager.) 

Seager,  Introduction,  §  123;  Seager,  Economics,  §84;  Marshall, 
Principles,  Bk.  V.,  ch.  10,  6;  Flux,  Economic  Principles,  p.  108  ; 
Nicholson,  Principles,  Bk.  II,  ch.  14,  §  5  ;  Elements,  Bk.  II.,  ch. 
10,  §  7  ;  Walker,  Political  Economy,  pp.  212-216. 

5.  Qualifications  of  the  Law  of  Rent. 

a.  The  rotation  of  crops  complicates  but  does  not  contra- 
dict the  law  of  rent.  The  product  of  the  entire  period  of  ro- 


66  Distribution  of  Wealth. 

tation  must  be  divided   among  the  years  to  find  the  annual 
product. 

b.  The  variations  of  weather  and  price  affect  returns  for  a 
year  ;  but  in  stating  law  of  rent  the  average  return  is  assumed. 

c.  Situation,  transportation  facilities  or  any  other  charac- 
teristic that  affects  utility,  is  as  important  as  fertility  in  deter- 
mining rent. 

Seager,  Introduction,  §§  124,  65;  Seager,  Economics,  §  85;  Bul- 
lock, Introduction,  §  271. 

6.    Rent  and  the  Land  Owner. 

a.  If  the  land  is  rented,  contract  rent  tends  to  approxi- 
mate the  economic  rent  more  or  less  closely  according  to  the 
extent  that  competition  prevails.     Custom,  a  feeling  of  obli- 
gation on  part  of  the  owner  or  other  cause  may  leave  part  of 
the  rent  in  the  hands  of  the  worker. 

b.  If  the  land  is  worked  by  the  owner,  the  economic  rent 
accrues  to  him.     It  is  not  always  differentiated  by  him  from 
other  parts  of  his  income. 

c.  The  capitalization  of  the  rent  at  the  current  rate  of  in- 
terest fixes  the  selling  price  of  land. 

d.  In  some  regions  rents  are  not  competitive,  but  are  fixed 
by  custom.     Such  are  the  system  of  farming  on  shares  and 
the  metayer  system. 

Marshall,  Principles,  Bk.  V.,  ch.  9,  §  3  ;  ch.  10;  Economics 
of  Industry,  Bk.VI.,  chs.  9,  10;  Seager,  Introduction,  §§  126, 128; 
Seager,  Economics,  §§  86,  87 ;  Bullock,  Introduction,  §§  270, 
275  ;  Seligman,  Principles,  §  163  ;  Fetter,  Principles,  ch.  15  ; 
Gide,  Principles,  pp.  606-613 ;  Flux,  Economic  Principles,  pp. 
114-117  ;  FJy,  Outlines,  pp.  359. 

7.    Tendency  of  Rent. 

Other  things  remaining  the  same,  an  increase  of  population 
or  of  the  standard  of  living  raises  rents.  This  is  true  both  of 
rural  and  urban  lands.  This  tendency  may  be  checked  by 


Distribution  of  Wealth.  67 

improvements  in  production  or  transportation  which  increase 
supply. 

Seligman,  Principles,  §  162  ;  Bullock,  Introduction,  §  276  ;  Gide, 
Principles,  pp.  590-593 ;  Davenport,  Outlines,  pp.  86-92 ;  Flux, 
Economic  Principles,  pp.  112-114;  Pierson,  Principles,  pp.  107- 
120;  Ely,  Outlines,  pp.  360-363. 

8.    Justification  of  Rent. 

Private  property  in  land  rent  is  attacked  by  different 
classes  of  social  critics.  "  The  question  of  the  justification  of 
rent  is  not  one  of  its  existence  but  of  its  disposition."  While 
from  the  individual  point  of  view  there  seems  much  ground 
for  objection  to  individual  appropriation  of  that  which  is  in 
part  the  gift  of  nature  and  in  part  social  product,  long  ex- 
perience shows  private  ownership  of  land  has  all  in  all  ad- 
vanced social  welfare.  Some  of  the  "  unearned  increment  " 
(not,  however,  peculiar  to  land)  might  be  heavily  taxed  with 
social  advantage. 

Seligman,  Principles,  §  164;  Seager,  Introduction,  §  299; 
Seager,  Economics,  §  236;  Smart,  Distribution,  pp.  306-308; 
Gide,  Principles,  pp.  593-600 ;  Ely,  Outlines,  pp.  363-366. 

G.     CONCLUSION    AS    TO    ACTUAL,    DISTRIBU- 
TION. 

a.  The  rewards  of  the  factors  of  production  are  derived 
from  and  depend  upon  the  values  of  the  commodities  they 
produce.      But  in  a  more  fundamental  sense  the  values  of 
commodities  depend  upon  these  rewards  of  the  factors  of  pro- 
duction.    The  values  of  commodities  and  the  shares  in  distri- 
bution are  but  two  ways  of  regarding  the  same  sum.     The 
National  Dividend  is  the  National  Income. 

b.  The  same  fundamental  principles  determine  the  values 
of  commodities  and  of  the  factors  of  production.     In  each 
case  it  is  the  marginal  utility ;  but  the  margin  is  fixed  by  the 
forces  of  supply,  or  in  other  words,  by  the  cost  of  production. 


68  Distribution  of  Wealth. 

Both  in  the  case  of  commodities  and  of  the  factors  of  produc- 
tion, the  departures  of  market,  or  actual,  values  from  normal 
values  are  to  be  explained  similarly. 

c.  Even  in  our  actual  changing  society  distribution  is  not 
accidental  or  arbitrary ;  nor  is  it  under  the  control  of  the 
powerful ;  but  tends  to  approximate  to  the  principle  of  re- 
ward according  to  deserts.  But  the  rapid  changes  in  modern 
society,  the  interference  with  the  perfect  working  of  compe_ 
tition,  the  monopolistic  conditions  that  prevail  and  the  im- 
mobility of  labor  due  largely  to  its  not  being  a  mere  com- 
modity, result  in  many  departures  from  a  desirable  result. 
There  is,  then,  opportunity  for  social  effort  to  minimize  these 
departures  from  an  ideally  just  distribution.  The  Labor 
Problem  deals  with  such  topics. 


CHAPTER  VIII. 
CONSUMPTION. 

(References  will  be  found  at  the  end  of  the  chapter.) 
I.    Definition  and   Discrimination. 

Consumption  is  the  destruction  of  utility.  The  purpose  of 
production  is  consumption  and  the  purpose  of  much  consump- 
tion is  production — an  incessant  cycle.  Economic  consump- 
tion is  the  destruction  of  utility  for  the  sake  of  advantage  ;  is 
is  either  unproductive  of  wealth  or  reproductive  of  wealth. 
Uneconomical  consumption  is  waste. 

2.  Dependence  of  Consumption  on  Utility. 

a.  A  thing  has  utility  because  of  the  psychological  condi- 
tion of  the  consumer.     Hence  the  consumption  of  a  person 
depends  upon  his  psychological  organization  and  character. 

b.  "The  art  of  consumption  consists  in  knowing  when  to 
leave  off  in  one  thing  and  begin  in  another.     The  ideal  of 
consumption  is  attained  when   the  marginal  utilities  of  the 
articles  consumed  are  all  equal."     (Nicholson). 

3.  Dependence  of  Consumption  on  Price. 

a.  Consumption    is   directly  dependent  upon  price  and 
therefore  constantly  limited  or  stimulated  by  all  changes  in 
methods  of  agriculture,  manufacture,  transportation  and  com- 
munication. 

b.  This  dependence  of  consumption  on  price   frequently 
leads  people  to  be  affected  unduly  by  prices.     Useless  things 
and  articles  of  poor  quality  are  bought  because  of  low  nomi- 


70  Consumption. 

nal  price.     The  desirability  of  intelligence  and  self-control  are 
evident. 

c.  Price,  however,  has  significance  only  when  compared 
with  income.  Normally,  income  not  only  does  but  should  fix 
consumption,  since  income  represents  a  person's  production 
of  utility  as  socially  estimated.  Ought  a  person  to  consume 
more  utility  than  he  produces  ?  It  should  be  remembered  that 
many  most  valuable  social  services  are  not  directly  paid  for. 

4.    Dependence  of  Consumption  on  Distribution. 

The  degree  of  equality  in  distribution  in  a  social  group 
shapes  its  consumption.  The  same  group  income  on  an  ante- 
bellum plantation  and  a  Brook  Farm  would  produce  very  dif. 
ferent  results.  Communal  or  social  consumption  is  economi 
cal  of  wealth ;  but  economy  is  not  desirable  at  the  expense  of 
broader  social  considerations. 

5.    Effect  of  Consumption  on  Production  and  Its  Methods. 

a.  The  stimulus  to  economic   progress  and  industry  is 
found  in  wants.    A  large  proportion  of  all  consumption  tends 
directly  or  indirectly  to  further  production  of  wealth. 

b.  Where  capital  and  labor  are  not  fully  employed,  de- 
mand for  commodities  may  increase  employment  of  labor. 

c.  Ordinarily,  demand  directs  rather  than  employs  labor. 
The  mere  destruction  of  wealth  does  not  produce  wealth. 
The  consumer  determines  the  form  of  wealth  produced.     De- 
mand  for  luxuries  is  no  more  a  demand  for  labor  than  any 
other  expenditure.     The  direction  of  labor  into  certain  lines 
results  in  a  permanent  means  of  further  production  or  enjoy- 
ment, in  contrast  with  that  which  is  merely  transitory.     The 
consumer  determines  whether  a  beautiful  or  an  ugly  thing  shall 
be  produced.      He  chooses  between  a  rapid  or  slow  destruc- 
tion of  wealth. 


Consumption.  71 

d.  Consumers  determine  the  numbers  employed  in  each 
occupation.     Some  of  these  occupations  are  educational  and 
tend  to  encourage  development  of  productive  skill ;  while 
others  are  debasing  and  not  productive  of  wealth. 

e.  Consumers  determine  industrial  methods.     Whether  it 
be  sweatshop  or  factory,  child  labor  or  skilled  adult  labor, 
hand  or  machine,  craftsmanship  or  highly  specialized  labor, 
is  for  the  consumer  to  decide.     The  department  store  and  the 
trust  are  due  to  the  patronage  of  the  public. 

Required  Reading  :  Bullock,  Selected  Readings 
in  Economics,  pp.  307-318  ;  Bastiat,  The  Seen  and 
the  Unseen. 

6.    Relation  of  Consumption  to  Accumulation. 

Saving  is  in  reality  the  accumulation  of  wealth,  most  of 
which  becomes,  by  investment,  capital.  If  all  should  save  in 
an  extreme  degree,  there  would  be  a  falling  off  in  demand  for 
the  very  goods  which  the  saving  would  help  produce.  The 
right  proportion  between  saving  and  consumption  is  attained 
automatically  through  price,  wages  and  interest.  At  present 
the  greatest  need  is  an  increase  of  expenditure  for  the  promo- 
tion of  efficiency  in  workers. 

7.    Wasteful  Consumption. 

There  is  much  waste  of  wealth  due  to  the  choice  of  the 
perishable  rather  than  the  durable  ;  to  imperfect  utilization  ; 
and  to  individual  rather  than  social  ownership  of  certain 
forms  of  wealth.  Not  all  high  prices  involve  great  cost. 

8.    Ethical  Aspects  of  Consumption. 

a.  Because  of  the  reaction  of  the  use  of  wealth  on  charac- 
ter, it  is  a  profoundly  ethical  question  what  one  buys  and 
consumes. 

b.  Even  more  important  is  the  effect  of  one's  consump- 
tion on  the  lives  of   others.     Because   of  the   complicated 


72  Consumption. 

nature  of  our  productive  system,  the  purchase  of  an  article 
which  may  in  no  way  injure  its  consumer,  may  involve 
physical,  intellectual,  artistic  and  moral  debasement  to  others. 
Although  for  the  most  part  unconsciously,  there  is,  perhaps, 
no  way  in  which  the  average  person  influences  the  lives  of 
others  more  constantly  than  by  his  expenditure.  Unneces- 
sary personal  service,  degrading  occupations,  long  hours  and 
bad  sanitary  conditions  in  store  and  factory,  the  sweatshop, 
child  labor  and  many  other  industrial  evils  could  not  exist 
were  consumers  aroused  to  their  ethical  obligations  and  organ- 
ized so  that  they  might  be  informed.  The  Consumers'  League 
aims  to  meet  this  need.  Labor  Legislation  and  the  Trade 
Union  Label  are  further  forces  in  this  direction.  As  Democ- 
racy in  its  social  sense,  or  as  Miss  Addams  puts  it,  ' '  identifi- 
cation with  the  common  lot, ' '  prevails,  the  aroused  conscience 
of  the  consumer  will  be  a  great  force  working  for  social  ad- 
vancement. 

9.    Consumption  Reflects  Social  Progress. 

The  civilization  of  every  period  is  largely  shown  by  its 
consumption — its  buildings,  weapons,  utensils,  objects  of  art, 
clothing,  etc.  The  costumes  of  the  different  classes  in  the 
middle  ages  were  a  reflection  of  the  constitution  of  the  society 
of  the  time.  The  disappearance  of  these  distinctive  caste  cos- 
tumes is  a  part  of  our  democratic  tendency.  That  alleged 
"  aping  of  their  superiors  ' '  which  leads  those  of  small  incomes 
to  dress  like  the  well-to-do  is  but  a  striving  to  realize  that 
Christian  Democracy  which  most  profess. 

Statistics  of  consumption  throws  much  light  on  the  question 
of  the  progress  of  the  working  classes. 

Seligman,  Principles,  §  228  ;  Seager,  Introduction,  §§  43-46; 
pp.  294-295 ;  Seager,  Economics,  §§  16-23  ;  Marshall,  Principles, 
Bk.  Ill,  ch,  6,  §§  4,  5 ;  Economics  of  Industry,  Bk.  Ill,  ch.  6,  § 
3  ;  Fetter,  Principles,  chs.  40,  41 ;  Gide,  Principles,  Bk.  V. ; 
Bullock,  Introduction,  §§  65-68  ;  Andrews,  Institute,  £§  50, 
124-331;  Davenport,  Outlines,  pp.  330-344;  Ely,  Outlines, 
(1908)  pp.  113-120;  Walker,  Political  Economy,  Pt.  V.,ch.  3; 


Consumption.  73 

Mill,  Principles,  Bk.  I.,  ch.  3,  §§4-6;  Hadley,  Economics,  pp. 
318-335 ;  Bastiat,  Essays  on  Political  Economy,  Essay,  ' '  That 
which  is  seen  and  that  which  is  not  seen;"  Palgrave,  Diction- 
ary, articles,  Consumption  and  Luxury  ;  Conrad,  Handworter- 
buch,  articles,  Konsumption  and  Luxus  ;  Leslie  Stephen,  Social 
Rights  and  Dut  es,  Essay  on  Luxury  ;  de  L/aveleye,  Luxurv  ; 
Elements  of  Political  Economy,  pp.  243-264 ;  Thompson,  The 
Purse  and  the  Conscience;  Stevenson,  Lay  Morals,  ch.  4 ;  Faw- 
cett,  Manual  of  Political  Economy,  pp.  19-29 ;  Ruskin,  Time 
and  Tide,  Lecture  2nd ;  Munera  Pulveris,  ch.  6  ;  Crown  of  Wild 
Olive ;  A  Joy  For  Ever ;  Unto  This  Last ;  Morris,  A  rchitecture, 
Industry  and  Wealth,  chs.  3,  4 ;  Say,  Treatise  on  Political  Econ- 
omy, Bk.  III.,  chs.  4,  5;  Smart,  Studies  in  Economics,  chs.  8,  9, 
10 ;  Taylor,  Exercises  in  Political  Economy,  ch.  9 ;  Richardson, 
The  Woman  Who  Spends ;  Veblen,  Theory  of  a  Leisure  Class  ; 
Blatchford,  Merrie  England,  ch.  23  ;  Ely,  Problems  of  To-day, 
ch.  15  ;  Devas,  Political  Economy,  pp.  6-7,  21,  chs.  6,  7  ;  Roscher, 
Principles  of  Political  Economy,  Vol.  II.,  pp.  221-252;  Allen, 
Democracy  and  Diamonds,  Contemporary,  59  :  666  ;  Addams, 
The  Social  Ministry  of  Wealth,  Int.  Jour,  of  Ethics,  4,  173  ; 
Davidson,  Luxury  and  Extravagance,  Int.  Jour,  of  Ethics,  9,  54 ; 
Devas,  The  Moral  Aspect  of  Consumption,  Int.  Jour,  of  Ethics, 
10  :  41;  Greg,  What  is  Culpable  Luxury  ?,  Contemporary,  21 :  216  ; 
Smith,  Mr.  Greg  on  Culpable  Luxury,  Contemporary,  22  :  126 ; 
de  Laveleye,  Morals  of  Luxury,  Pop.  Sci.  Mon.,  28  :  669  ;  Leroy- 
Beaulieu,  The  Office  of  Luxury,  Pop.  Sci.  Mon.,  47:25;  The 
Social  Function  of  Wealth,  Pop.  Sci.  Mon.,  48:829;  Martin,  Is 
Lavish  Expenditure  of  Wealth  Justifiable  ?,  19th  Century,  44:1024; 
Moran,  The  Ethics  of  Wealth,  Am.  Jour.  Sociology,  6:823  ;  Sidg- 
wick  Luxury,  Int.  Jour,  of  Ethics,  5:1:  Simey,  Luxury, 
Ancient  and  Modern,  Econ.  Rev.  12  : 146  ;  Luxury  in  America, 
Spectator,  82  :  482.  The  Duties  of  the  Very  Rich,  Spectator,  78  : 
168 ;  Culpable  Luxury,  Spectator,  77  : 511  ;  Ward,  The  Use  and 
Abuse  of  Wealth,  Forum,  2:549;  Reports  and  Pamphlets  of  the 
Consumers'  league  and  of  the  National  Consumers'  league, 


C  HATER  IX. 
MONEY. 
I.     Origin. 

a.  The  division  of  occupations  made  necessary  exchange 
which  was  at  first  carried  on  by  barter.     Barter  has  serious 
disadvantages,  since  each  article  must  be  valued  in  terms  of 
all  others  ;  since  many  articles  are  not  subdivisible  ;  and  since 
there    is   such   limited   correspondence   between    needs  and 
goods. 

b.  Gradually   certain   articles,   very   generally  desirable, 
were  selected    instinctively  as   media   of  exchange.     These 
articles  were  frequently  connected  with   the  industry  of  the 
time.     Skins,  cattle,  wheat,  tobacco,  salt,  nails,  cloth,  wam- 
pum, are  a  few  of  the  articles  which  have  served  as  money. 

c.  The  qualities  necessary  for  a  satisfactory  money  are 
general  desirability,   durability,   divisibility,  adaptability  to 
coinage,  high  value  in  proportion  to  bulk,  steadiness  of  value. 
Copper,  iron,  lead,  zinc,  have  served  as   money,  but   silver 
and  gold  have  replaced  all  others  except  for  very  small  coins. 
The  very  elastic  demand  for  the  precious  metals  and  the  con- 
stancy of  their  supply,  composed   of    the  accumulations  of 
centuries,  are  the  cause  of  the  stability  of  value  of  gold  and 
silver. 

d.  Government,  then,  does  not  arbitrarily  select  the  money 
commodities,  but  recognizes  actual  usage.    Government  gives 
certainty  and  definiteness  to  money  by  establishing  a  standard 
of  weight  and  fineness.     Government  also  declares  certain 
money  legal  tender,  which  must  then  be  received  in  payment 
of  debt. 


Money.  75 

Seager,  Introduction,  §§168,  170;  Seager,  Economic*,  §§  118, 
120;  Seligman,  Principles,  p.  451  ;  Fetter,  Principles,  ch.  13,  §  1  ; 
Bullock,  Introduction,  %%  131,  132,  133,  135  ;  Gide,  Principles, 
pp.  213-218  ;  Andrews,  Institutes,  §§  72-75  ;  Hadley,  Economics, 
££  205-207,  209 ;  White,  Money  and  Banking,  Bk.  I,  ch.  1  ;  Scott, 
Money  and  Banking,  pp.  15-20;  Jevons,  Money  and  the  Mechan- 
ism of  Exchange,  chs.  1,  4,  5,  6,  8,  9;  Walker,  Money,  ch.  2  ; 
Political  Economy,  pp.  120-126;  Mill,  Principles,  Bk.  Ill,  ch.  7. 

Required  Reading :  Bullock,  Selected  Readings  in 
Economics,  pp.  387-405 ;  The  Natural  History  of 
Money. 

2.    Coinage. 

a.  Coinage  has  undergone  a  long  process  of  evolution.  At 
first  the  quality  of  the  metal  was  attested  by  the  seal  of  a  ruler. 
Then  the  weight  was  stamped  on  the  coin.    Successive  changes 
have  by  gradual  selection  resulted  in  the  present  form  of  coin. 

b.  Coins  are  ''ingots  of  which  the  weight  and  fineness 
are  certified  by  the  integrity  of  designs  impressed  upon  the 
surface  of  the  metal."     Jevons.    Coinage  endeavors,  then,  to 
fix  with  exactness  the  weight  and  fineness  of  the  metal  and  to 
make  alteration  of  the  coin  impossible  without  detection. 

c.  "Free   Coinage"   means  that  anyone  may  bring  any 
amount  of  bullion  to  the  mint  and  have  it  coined.     If  this 
work  of  coinage  is  done  without  charge  the  coinage  is  said  to 
be  gratuitous.      A  charge  for  coinage  equal  to  the  expense  in- 
volved   is    called    brassage.     If  more  metal  is  kept  by  the 
government  than  is  sufficient  to  cover  cost,  this   deduction  is 
called    seigniorage.     If  seigniorage    is   deducted    from   legal 
tender  coin  the  money  is  said  to  be  debased. 

d.  Mobility  of  the  precious  metals  from  monetary  to  other 
uses  and  vice  versa  is  secured  by  free  and  gratuitous  coinage. 
Desirable  as  this  is  in  the  case  of  standard  coins,  it  involves 
expense  and  inconvenience  without  compensating  advantage 
to    have   the    lesser    coins   turned  into  bullion  without  loss. 
Limited  issues  of  small  coins  having  less  than  their  proper- 


76  Money. 

tionate  share  of  metal  are  therefore  made  and  called  subsidiary 
or  token  coinage.  Such  coins  are  usually  legal  tender  to  only 
a  limited  amount. 

e.  The  "mint  price"  is  the  amount  of  money  which  a 
given  amount  (usually  an  ounce)  of  metal  will  produce  when 
coined.  The  mint  price  of  gold  in  the  United  States  is 
$20.67  Per  ounce.  The  bullion  value  of  a  silver  dollar  would 
equal  the  face  value  if  silver  sold  at  $1.29  an  ounce.  The 
difference  between  the  face  and  the  bullion  value  of  a  silver 
dollar  is  seigniorage. 

Seager,  Introduction,  §  171  ;  Seager,  Economics,  §  121 ;  Selig- 
man,  Principles,  (3rd  ed.)  §188;  Fetter,  Principles,  ch.  45,  §1; 
Bullock,  Introduction  §§  134,  147  ;  Hadley,  Economics,  §§  208, 
210,  211  ;  White,  Money  and  Banking,  Bk.  I.,  ch.  2;  Johnson, 
Money  and  Currency,  pp.  177-187,  p.  12 ;  Scott,  Money  and 
Banking,  pp.  69-83  ;  Jevons,  Money  and  the  Mechanism  of  Ex- 
change, chs.  7,  13  ;  Walker,  Money,  chs.  9,  10 ;  Political  Econ- 
omy, pp.  126,  127,  143-147 ;  Nicholson,  Money  and  Monetary 
Principles,  pp.  35  52;  Principles,  Bk.  III.,  ch.  12;  ch.  13,  §§  3, 
4;  Kly,  Outlines,  pp.  217-221. 

3.    Functions  of  Money. 

a.  The  word  money  is  used  in  different  senses  as  the  point 
of  view  is  scientific,  popular,  financial,  legal,   or  figurative. 
It  maybe  defined  as  "  a  generally  accepted  material  means 
of  payment  and  medium  of  exchange."     (Fetter.) 

b.  Money  serves  as  a  medium  of  exchange,  a  measure  of 
value  and  a  standard  of  deferred  payment. 

c.  As  a-  large  part  of  all  business  is  based  upon  credit  and 
carried   on  by  credit  instruments,  an  important  function  of 
money  is  to  serve  as  a  cash  reserve  to  insure  solvency. 

Seager,  Introduction,  §  168 ;  Seligman,  Principles,  §  187 ;  Bui 
lock,  Introduction,  §  146  ;  Hadley,  Economics  §  202  ;  Fetter, 
Principles,  ch.  13,  §  2,  3  ;  Johnson,  Money  and  Currency,  pp.  11- 
17  ;  Scott,  Money  'and  Banking,  ch.  1  ;  Walker,  Money,  ch.  1  ; 
Jevons,  Money,  etc.,  ch.  3;  Nicholson,  Principles,  Bk.  III.,  ch.  9; 
Money  and  Monetary  Principles,  pp.  13-23. 


Money.  77 

4.    Value  of  Money. 

a.  The  value  of  money  is  its  power  in  exchange.     It  is 
high  when  prices  are  low  j  low  when  prices  are  high. 

b.  The  value  of  money  is  determined  by  the  demand  for 
and  the  supply  of  money.     Other  things  remaining  equal, 
diminishing  marginal  utility  decreases  the  value  of  money  as 
its  quantity  increases.     "Demand  for  the  money  commodity 
depends  (a)   on  the  use  of  the  commodity  for  other  than 
monetary  purposes,  (b)  on  the  amount  of  business,  and  (c)  on 
the  need  for  money  as  a  reserve  for  credit  operations.     The 
general  law  of  the  value  of  money  may  thus  be  expressed  in 
the  equation  ;  the  volume  of  money  multiplied  by  the  rapidity 
of  circulation  is  equal  to  the  number  of  transactions  in  cash 
that  are  effected  at  a  given  price  level."     (Seligman,  p.  456.) 

c.  Cost  of  production  is  related  to  the  value  of  money  as 
it  is  to  any  other  value,  but  its  influence  is  felt  slowly  because 
the  existing  stock  is  very  large  compared  with   the  annual 
production.     If  the  level  of  prices  is  low,  then  production  of 
the  money  commodity  is  accelerated.    Also  if  the  cost  of  pro- 
duction of  the  money  commodity  is  decreased,  its  production 
is  accelerated.     Such  increased  production  tends  to  continue 
until  the  value  of  money  is  equal  to  the  marginal  cost  of  pro- 
duction of  the  money  commodity. 

d.  Changes  in  value  of  money  may  proceed  from  a  change 
in  amount  of  goods  offered  for  sale ;  from  a  change  in  the 
quantity  of  the  money  commodity  produced ;  from  a  change 
in  the  relative  amount  of  the  money  commodity  demanded 
in  the  arts  ;  or  from  a  change  in  the  rapidity  of  circulation. 

e.  Since  every  change  in  the  value  of  money  reacts  upon 
business,  upon  the  cost  of  living  and  upon  obligations  of  debtors 
and  claims  of  creditors,  steadiness  of  value  is  most  necessary. 

/.     Since  the  relative  values  of  other  commoditie   are  con- 
stantly changing,  it  is  hot  possible  to  ascertain  changes  in  the 


78  Money. 

value  of  money  by  changes  in  the  price  of  one  article. 
Changes  in  value  of  money  are  best  ascertained  by  index  num- 
bers. Comparison  of  the  weighted  averages  of  the  prices,  at 
different  times,  of  carefully  selected  list  of  commodities  will 
indicate  whether  the  general  price  level  is  rising  or  falling, 
and  consequently  whether  money  is  more  or  less  valuable.  As 
indications  of  changes  in  general  well-being,  index  numbers 
must  be  used  with  caution  since  they  "  deal  with  payments 
for  products  and  not  for  services  ; — with  wholesale  prices  in- 
stead of  retail  ones ; —  [and]  are  based  on  prices  in  the  whole- 
sale markets  nearest  the  point  of  consumption."  (Hadley.) 

g.  Under  free  coinage  the  division  of  a  precious  metal 
between  the  arts  and  monetary  use  is  determined  by  the 
relation  of  the  marginal  utility  in  one  use  to  that  in  the  other. 
"Equilibrium  is  reached  when  the  marginal  utility  of  an 
ounce  of  gold  employed  in  the  arts  is  equal  to  the  marginal 
utility  of  the  things  which  that  ounce  will  buy  if  it  is  con- 
verted into  money."  (Hadley.) 

h.  If  the  money  supply  of  a  country  is  large  compared  with 
that  of  other  countries,  prices  in  that  country  will  be  relatively 
high.  The  resulting  excess  of  imports  into  that  country  will 
in  time  cause  an  export  of  money.  A  deficiency  of  money 
will  cause  a  reverse  tendency.  This  is  commonly  described 
as  the  International  Distribution  of  Money. 

z.  Sir  Thomas  Gresham  (i6th  century)  observed  that  when 
such  a  movement  of  money  occurred,  full  weight  coins  were 
selected  for  export  since  they  were  taken  abroad  only  by  weight, 
while  worn  or  debased  coins  were  kept  at  home,  since  they 
passed  for  face  value.  He  enunciated  the  law  that  "bad 
money  always  drives  out  good  money. ' '  This  is  true  only 
when  the  country  has  relatively  to  others  an  excess  of  money. 
Thus  qualified  the  principle  explains  the  shipments  of  the 
more  valuable  metal  from  a  bimetallic  country  and  the  exports 
of  metallic  money  from  a  country  issuing  paper  money  in  excess. 


Money.  79 

j.  A  deficiency  of  money  is  temporarily  overcome  by  a 
diversion  of  a  relatively  greater  portion  of  the  monetary  metal 
into  monetary  uses  either  from  the  new  supplies  or  from  the 
amount  of  the  metal  in  use  in  the  arts  or  as  ornament.  A 
more  permanent  deficiency  is  met,  as  has  been  shown,  by  in- 
creased production. 

k.  A  temporary  relative  deficiency  of  money  in  one 
country  results  in  a  rise  of  interest  on  short  term  loans  in  that 
country.  This  attracts  money  from  foreign  banking  centers. 
Should  the  deficiency  be  more  permanent  or  serious,  it  is 
overcome  by  the  principle  of  the  International  Distribution 
of  Money. 


,  Principles  (3ded.),  §3  189-197,  200;  Seager,  Introduc- 
tion, §§  172,  193-200;  Seager,  Economics,  §§  119,  122,  144-149; 
Bullock,  Introduction,  §§  137-142,  145,  147-150,  152-154;  Hadley, 
Economics,  §§  212,  216-229;  Johnson,  Money  and  Currency,  pp. 
17-33,  103-134,  194-201;  Gide,  Principles,  pp.  223-227,  237-241; 
Fetter,  Principles,  pp.  436-447;  Walker,  Political  Economy,  pp. 
127-142;  Money,  chs.  3,  4;  Nicholson,  Principles,  Bk.  III.,  chs.  13, 
14,  17;  Mill,  Principles,  Bk.  III.,  chs.  8,  9,  19,  20;  Nicholson, 
Money  and  Monetary  Problems,  pp.  23-71,  85-106,  126-147;  Scott, 
Money  and  Banking,  ch.  4. 

5.    The    Production  of  the  Precious  Metals   and  their  Relative 

Value. 

a.  The  forms  in  which  the  precious  metals  are  found  in 
the  earth  and  the  methods  of  extracting  them  have  had  and 
still  have  important  effects  on  their  monetary  value.     Gold  is 
one  of  the  most   widely  distributed  metals.     It  is  found  in 
placers  ;  in  beds  of  existing  or  former  rivers  ;  in  quartz  and 
other  rocks  ;  in  clay  and  even  in  sea-water.     This  wide  dis- 
tribution of  gold  has  important  bearing  on  its  steadiness  of 
value. 

b.  Gold  is  separated  from  sand  or  gravel  by  washing, 
either  by  the  process  of  "  panning  "  or  by  "sluicing."    Hy- 
draulic mining  is  an  extension  of  sluicing.      "Dredging"* 
may  also  be  considered  another  extension  of  this  method. 


8o  Money. 

Quicksilver  is  used  in  the  final  collection  of  the  gold  in  con- 
nection with  these  processes.  Some  gold  ores  are  crushed 
and  treated  with  quicksilver  ;  others  are  treated  by  a  chlorina- 
tion  process ;  but  more  recently  they  have  been  treated  most 
economically  by  the  cyanide  process.  Some  ores  are  best 
treated  by  smelting.  The  modern  application  of  capital  and 
science  to  extraction  of  gold  has  had  important  results  on  its 
supply  and  its  value. 

c.  Silver  is  found  free  or  in  chemical  combination  or  in 
combination  with  other  metals.     It  is  secured  by  amalgama- 
tion, by  smelting,  or  by  elaborate  technical  methods.     The 
application  of  capital  and  modern  scientific  methods  have 
decreased  its  cost  of  production. 

d.  In  the  ancient  world  great  stores  of  the  precious  metals 
were  accumulated  for  non-economic  reasons.     These  hoards 
were  widely  scattered  by  the  Alexandrine  and  Roman  con- 
quests, with  beneficial  effects  on  commerce.     During  the  later 
Empire  production,  which  was  now  carried  on  for  economic 
reasons,  was  checked  by  war,  scarcity  of  slaves,  bad  mining, 
the  lease  system  and  the  barbarian  invasions.     The  low  prices 
resulting  from  the  scarcity  of  the  precious  metals  were  among 
the  economic  causes  of  the  Fall  of  the  Empire.     Production 
continued  insignificant  through  the  Middle  Ages,  although 
slightly  stimulated  by  the  Crusades. 

<?.  After  the  discovery  of  America  the  existing  treasures  of 
Mexico  and  Peru  were  added  to  the  money  of  Europe  with 
slight  effect ;  but  the  discovery  of  the  silver  mines  of  Potosi 
and  the  invention  of  the  amalgamation  process  of  extracting 
silver  (both  in  1545)  caused  a  great  increase  in  the  money 
supply  of  the  Old  World.  Gradually  these  new  supplies 
spread  by  trade  routes  causing  a  great  increase  in  prices, 
stimulating  commerce,  affecting  political  and  social  condi- 
tions and  arousing  economic  thought. 


Money.  81 

/.  Among  the  Romans  an  ounce  of  Gold  was  worth  about 
ten  or  eleven  of  silver.  Successive  influences  changed  the 
relative  production  and  demand  of  the  precious  metals,  thus 
affecting  the  ratio  between  them  until  in  1680  an  ounce  of 
gold  was  worth  15  of  silver.  For  two  centuries  this  remained 
a  normal,  the  ratio  almost  never  going  above  i  to  16  or  below 
i  to  14.  The  production  of  silver  compared  with  that  of  gold 
from  the  middle  of  the  i6th  century  was  much  greater  than 
this  proportion.  Silver  did  not  decline  in  value,  however, 
because  it  was  the  money  used  in  domestic  trade  and  because 
the  field  for  its  employment  was  much  enlarged  by  the  growth 
of  Oriental  trade.  From  1820  to  1850  the  value  of  the  ounce 
of  gold  ranged  between  15.562  oz.  and  15.95  oz.  of  silver. 

g.  The  gold  discoveries  of  1849  in  California  and  Austra- 
lia were  followed  by  an  enormous  increase  in  the  production 
of  gold,  both  absolutely  and  relatively  to  silver.  During  the 
preceding  half-century  there  had  been  produced  annually  from 
thirty  to  fifty  times  as  much  silver  as  gold  (by  weight)  ;  from 
1850  to  1870  there  was  produced  only  five  or  six  times  as 
much  silver  as  gold.  This  revolutionary  change  in  relative 
production  caused  only  a  slight  change  in  the  ratio  of  value 
which  ranged  during  most  of  the  time  around  15.38. 

h.  Between  1870  and  1890  the  annual  production  of  gold 
was  less  than  in  the  preceding  period,  while  the  production 
of  silver  increased  largely,  so  that  relatively  the  production 
of  silver  was  decidedly  increased,  being  roughly  from  eleven 
to  twenty  times  as  large  as  that  of  gold.  The  ratio  of  gold  to 
silver  changed  steadily  and  rapidly,  reaching  i  to  22  in  1889. 

/".  Since  1890  the  production  of  both  metals  has  been  very 
large,  that  of  gold  increasing  every  year  except  for  the  inter- 
ruption due  to  the  Boer  war.  Gold  production  is  now  about 
three  times  as  large  annually  as  that  of  the  years  following 
1849.  Being  due  largely  to  cheapened  methods  it  bids  fair 
to  continue.  In  spite  of  this  the  ratio  of  value  of  gold  to 
silver  has  become  i  to  35  or  even  38. 


82  Money. 

White,  Money  and  Banking,  pp.  41-59  ;  Johnson,  Money  and 
Currency,  pp.  208-216;  Seligman,  Principles  (3rd  ed.),  §201; 
Walker,  Money,  chs.  5-8;  International  Bimetallism,  chs.  1,  2  ; 
International  Encyclopedia  and  other  Encyclopaedias  under  Gold 
and  Silver ;  Meade,  The  Story  of  Gold. 

7.    Government  Paper  Money. 

a.  Coin  certificates,  or  representative  money,  certify  that 
metallic  money  is  on  deposit  with  the  government  and  is  pay- 
able to  the  holder  of  the  certificate.      United  States  gold  and 
silver  certificates  are  examples.     Such  money  is  convenient, 
but  adds  nothing  to  the  volume  of  money  and  has  no  effect 
on  prices. 

b.  Redeemable  paper  money  is  a  government  promise  to 
pay  a  certain  amount  of  metallic  money  on  demand,  is  in 
such  form  as  to  circulate  as  currency,  is  usually  legal  tender 
and  is  actually  redeemed  in  metal  on  presentation.      United 
States  "greenbacks"  since  1879  have  been  of  this  descrip- 
tion.    Such  money  is  convenient ;    it  is  cheaper  than  gold  or 
silver  since  it  sets  a  certain  amount  of  metal  free  for  other 
uses ;    it  is  safe  provided  it  is  so  limited  in  amount  as  not  to 
drive  all  metal  from  the  country  and  if  prompt  redemption  is 
maintained.     If  introduced  into  the  circulation  gradually  it 
would  have  the  same  effect  as  an  equal  amount  of  metal. 
Since  these  conditions  depend  upon  the  faith  of  the  issuing 
government  and  since  it  is  usually  issued  in  times  of  great  finan- 
cial need,  redeemable  paper  usually  becomes  irredeemable. 

c.  Irredeemable  paper  is  a  mere  promise  to  pay,  or  even 
a  mere  assertion  of  value,   forced  into  circulation  by  being 
made  legal  tender.      Were  such  money  strictly  limited  in 
amount,  or  so  regulated  in  amount  as  to   preserve  a  uniform 
level  of  prices,   it  would  be  a  cheap  and  effective  means  of 
exchange  within  a  country.     In  actual  experience  over-issue 
has  almost  invariably  resulted,  either  because  the  urgent  finan- 
cial needs  of  the  government  led  legislators  to  increase  issues, 
or  because  debtors  have  successfully  agitated  for  cheap  money 


Money.  83 

with  which  to  pay  their  debts.  Our  colonial  paper  monies, 
the  Continental  Currency,  the  United  States  Civil  War  issues, 
the  Confederate  Currency,  the  French  Revolutionary  assignats 
and  many  other  examples  show  that  paper  money,  nominally 
limited  and  redeemable,  is  over-issued  and  becomes  irredeem- 
able. It  causes  inflation,  depreciation,  over-speculation.  It 
is  unjust  to  creditors,  to  those  on  fixed  incomes,  to  working- 
men  ;  and  works  general  injury. 

Hadley,  Economics,  §§  214,  251 ,  255 ;  Seligman,  Principles 
(3rd  ed.),  §207;  Bullock,  Introduction,  pp.  257-263;  Fetter, 
Principles,  pp.  447-452  ;  Walker,  Political  Economy,  pp.  152-165  ; 
Money,  Part  II.;  Scott,  Money  and  Banking,  ch.  6;  Johnson, 
Money  and  Currency,  pp.  318-331 ;  Nicholson,  Principles,  Bk. 
III.,  ch.  15;  Gide,  Principles,  pp.  258-273;  Mill,  Principles,  Bk. 
III.,  ch.  13. 

Required  Reading  :  Bullock ,  Selected  Readings  in 
Economics,  ch.  15  ;    White,  Paper  Money  in  France. 


CHAPTER  X. 

CREDIT  AND  BANKING. 

A.    THE  NATURE  OF  CREDIT  AND  ITS  FORMS. 

a.  "  Credit  may  be  defined  as  the  power  to  secure  com- 
modities or  services  at  the  present  time  in  return  for  some 
equivalent  promised  at  a  future  time."     (Bullock.) 

b.  Credit  is  based  upon  confidence  in  the  honesty  of  the 
debtor  and  in  his  ability  to  secure  the  value  promised. 

c.  Credit  is  a  means  of  transferring  capital ;  lies  at  the 
basis  of  all  modern  business ;  and  is  an  important  factor  in 
wealth  production,  since  by  means  of  it  capital  passes  from 
the  less  to  the  more  profitable  uses. 

d.  Book  accounts,  that  is,  the  mere  charging  of  goods  on 
account  books,  are  an  important  form  of  credit. 

e.  A  promissory  note  is  a  written  promise  to  pay  a  speci- 
fied sum  on  demand  or  at  a  given  time.     By  endorsement  it 
may  be  transferred  from  person  to  person  and  serve  as  a 
medium  of  payment. 

f.  A  check  is  an  order  to  a  bank  to  pay  to  a  person  named 
a  certain  sum  of  money.     It  presupposes  a  claim  upon  the 
bank,  and  by  endorsement  may  pass  from  hand  to  hand  as  a 
medium  of  payment. 

g.  A  draft,  or  bill  of  exchange,  is  an  order  drawn  by  one 
person  upon  another  requesting  the   payment  of  a  sum  of 
money.     It  is  commonly  based  upon  a  debit  owing  to  the  one 
making  the  draft.     It  also  may  pass  from  hand  to  hand  by 
endorsement. 


Credit  and  Banking.  85 

h.  Bank  notes  or  government  notes  are  promises  of  a  bank 
or  of  a  government  respectively  to  pay  a  stated  sum,  usually 
on  demand.  Being  in  the  form  of  money  they  pass  from 
hand  to  hand  without  endorsement. 

Bullock,  Introduction,  §§  160-165;  Seager,  Economics,  §§  129, 
130;  Johnson,  Money  and  Currency,  pp.  34-37;  46-50;  Seligman, 
Principles  (3d  ed.),  §§  209,  210;  Seager,  Introduction,  §  180,  181; 
Andrews,  Institutes,  |  88;  Hadley,  Economics,  §§  256  259;  Scott, 
Money  and  Banking,  pp.  12,  13,  136-147;  Mill,  Principles,  Bk. 
III.,  ch.  11. 

B.    BANKS  AND  BANKING. 

\.    Banking  Functions. 

a.  A  bank  is  "  a  manufactory  of  credit  and  a  machine  of 
exchange."     J.  F.  Johnson  says  :     "  The  reader  must  rid  his 
mind  of  the  common  notion  that  a  bank  deals  in  money.    Just 
as  a  hardware  store  handles  hardware,  a  dry-goods  store  dry- 
goods,  or  a  grocery  store  groceries,  so  a  bank  handles  credit. 
Money  is  not  the  thing  it  deals  in  any  more  than  money  is 
the  thing  in  which  a  hardware  store  deals." 

b.  A  person  having  wealth  in  process  of  manufacture  or 
sale  may  have  no  acceptable  means  of  payment  for  an  exten- 
sion or  continuance  of  his  business,  even  though  he  have  much 
wealth.      His  credit,  based  on  his  wealth,  may  be  taken  by  a 
bank  in  return  for  its  own  credit  which  will  have  more  general 
acceptability  as  a  means  of  payment  than  would  his.       His 
wealth,  unavailable  as  a  means  of  payment,  becomes  the  basis 
of  an  available  means  of  payment. 

c.  A  bank  by  loaning  or  guaranteeing  credit  thus  creates 
a  most  important,  if  not  the  most  important,  medium  of  pay- 
ment in  modern  business.     Although  personal  credit  may  and 
does  serve  as  a  medium  of  payment,  the  specialization  of  the 
work  of  examining  and  attesting  it  in  banks  greatly  facilitates 
and  extends  its  use.     A  good  banking  system  aids  enormously 
in  the  production  of  wealth. 


86  Credit  and  Banking. 

d.  The  more  concrete  functions  of  a  bank  by  which  it 
performs  its  general  function  of  making  credit  are 

(1)  Discount.     In    exchange   for  a  promissory  note  (or 
other  form  of  credit)   involving  a  promise  to  pay  a  specified 
sum  at  a  specified  date,  and  properly  secured,  the  bank  gives 
the  right  to  receive  at  once  the  amount  promised  in  the  note 
less  the  interest  for  the  time  the  note  will  run.     A  right  to 
receive  value  in  the  future  is  sold  for  a  right  to  receive  less 
value  at  present. 

(2)  Deposit.     While    the  proceeds  of  the  note  may  be 
drawn  in  money  at  once,  they  are  commonly  entered  in  the 
books  of  the  bank  as  a  deposit  to  the  credit  of  the  borrower. 
As  such  they  may  be  drawn  in  money  from  time  to  time  or 
transferred  by  check.      This  right  to  draw  at  will  may  also 
result  from  the  actual  deposit  of  money  or  credit  instruments 
that  are  claims  on  others.     The  deposit  is  thus  a  liability  of 
the  bank  which  serves  as  a  medium  of  payment. 

(3)  Issue.     The  bank  note,  or  general  promise  of  a  bank 
to  pay  money,  is  essentially  the  same  as  a  deposit,  being  a 
liability  of  the  bank  which  serves  as  a  medium  of  payment. 
It  is  different  in  form  and  often  in  security.     Whether  the 
depositor  will  use  the  deposit  or  bank-note  as  a  medium  of 
payment  depends  upon  his  business  and  convenience. 

c.  Loans  and  deposits  tend  to  fluctuate  simultaneously, 
not  mainly,  as  commonly  thought,  because  money  deposited 
is  loaned  out,  but  because  loans  result  in  deposits. 

/.  Banks  facilitate  business  in  other  ways,  collecting  notes 
and  bills  of  exchange,  serving  as  financial  agents,  buying  and 
selling  foreign  exchange,  etc. 

Dunbar,  Theory  and  History  of  Banking,  ch.  2 ;  Scott,  Money 
and  Banking,  pp.  120-134  ;  Johnson,  Money  and  Currency,  pp. 
44-46 ;  Bullock,  Introduction,  pp.  273-278 ;  Seligman,  Princi- 
ples, (3rd  ed.),  £§  211,  212;  Seager,  Introduction,  §385;  Seager, 
Economics,  §§  133,  134 ;  Gide,  Principles,  pp.  367-378  ;  Fetter, 
Principles,  pp.  462-465;  White,  Money  and  Banking,  (3rd  ed.), 
pp.  193-197  ;  Ely,  Outlines,  (1908),  pp.  246-250. 


Credit  and  Banking.  87 

2.     Kinds  of  Banks. 

a.  Banks  of  deposit  and  discount  are  those  whose  functions 
are  those  just  described.     Issue  is  not  an  essential  function. 
In  the  United  States  such  banks  may  be  chartered  by  the 
national  or  state  government,  may  be  private,  or  may  be  trust 
companies  having,  as  such,  other  financial  functions.     Only 
banks  chartered  by  the  national  government  now  issue  notes 
in  this  country. 

b.  Savings  banks  exist  to  receive  and  invest  comparatively 
small  sums.     In  some  states  they  are  philanthropic  in  nature. 
Under  the  best  regulated  state  systems  they  do  not  do  a 
general  banking  business,  but  invest  only  in  certain  approved 
kinds  of  securities. 

3.    Banking  Operations  and  Accounts. 

a.  The  joint  stock  company  is  the  general  form  of  organi- 
zation.    The  stockholders  of  an  incorporated  bank  elect  a 
board  of  directors  in  whose  hands  rests  the  entire  management 
of  the  bank  during  their  term  of  office.    They  elect  president, 
vice-presidents,  cashier,  all  other  officers,  decide  upon  invest- 
ments and  control  general  policy.     That  in  some  cases  they 
are  largely  influenced  by  the  president  or  cashier  does  not 
affect  the  fact  of  the  legal  and  moral  responsibility  of  the 
directors. 

b.  The  capital  is  the  amount  of  money  subscribed  by  the 
shareholders  when    the  bank  is  organised.     In   the  United 
States  it  is  usually  divided  into  shares  of  $100.     Different 
rules  prevail  under  different  bank  systems  as  to  the  proportion 
of  the  capital  that  must  be  paid  in  before  business  is  begun. 
The  surplus  paid  in  by  shareholders  or  accumulated  from 
profits  is  practically  an  addition  to  capital.     The  function  of 
capital  and  surplus  is  to  serve  as  a  guarantee  of  ultimate 
solvency.     Should  losses  be  met,  they  fall  on  surplus  and 
capital. 


88  Credit  and  Banking. 

c.  Since  the  bank  must  meet  all  claims  promptly,  its  in- 
vestments must  be  such  as  can  be  turned  into  cash  quickly. 
Short  term  business  paper  and  bills  of  exchange  are  the  most 
common  investments.     Properly  secured  by  endorsement  or 
collateral  they  are  safe  ;  the  rate  of  interest  upon  them  is 
equal  to  that  on  other  equally  safe  investments  ;  and  since 
they  are  constantly  falling  due,  they  enable  a  bank  to  expand 
or  contract  loans  quickly.     A  bank  may  also  invest  in  stocks 
and  bonds  that  have  a  quick  market,  especially  if  it  has  many 
steady  accounts.     Real  estate,  except  a  banking  house,  is  a 
bad  banking  investment.     The  greater  the  amount  of  invest- 
ments the  greater  the  income.    A  bank,  then,  desires  to  invest 
all  its  funds ;  but  since  it  must  meet  in  legal  tender  money  on 
demand  all  claims  of  depositors,  it  must  so  limit  its  invest- 
ments as  to  have  sufficient  for  this  purpose. 

d.  The  reserve  is  the  amount  of  legal  tender  money  kept 
on  hand  by  a  bank  in  order  to  meet  promptly  all  demands. 
Its  function  is  not  so  much  to  secure  ultimate  as  immediate 
payment  of  obligations.     The  amount  of  reserve  that  should 
be  kept  depends  upon  the  nature  of  a  bank's  business  and  the 
general  financial  condition  of  the  country.     The  proportion 
is  sometimes  prescribed  by  law.     Reserve  is  estimated  as  a 
percentage  against  deposits,   or,   in  some  cases,  against  all 
demand  liabilities.     It  may  be  increased  either  by  increasing 
money  on  hand,  or  by  decreasing  liabilities.     A  contraction 
of  loans  is  the  most  frequent  actual  process  of  accomplishing 
such  increase. 

e.  A  bank  statement  issued  periodically  sets  forth  in  more 
or  less  detail  a  bank's  condition.     On  one  side  are  given  the 
liabilities  which  are  of  two  general  classes  ;    those  due  to  the 
shareholders  as  such  ;    and  those  due  to  all  others.     The  fol- 
lowing is  a  simple  example  of  a  statement  of  a  bank  that  does 
not  issue  notes  ; 


Credit  and  Banking. 


LIABILITIES. 

Capital,  .  .  .  $100,000 

Surplus,  .  .  .  20,000 

Profits,  .  .  .  5,649 

Deposits,  .  .  .  754,237 


$879,886 


ASSETS. 

Loans,  .... 
Stocks  and  bonds, 
Real  estate,     . 
Other  assets    . 
Expenses,  . 
Reserve,    . 


$595, 621 

130,000 

30,000 

2,659 

1,506 

120,100 

$879,886 


Dunbar,  Theory  and  History  of  Banking ',  ch.  3;  Seligman, 
Principles,  (3rd  ed.),  §§  213,  215  ;  Seager,  Introduction,  §§  184, 
185;  Seager,  Economics,  §§  131,  133,  134;  White,  Money  and 
Banking,  (3rd  ed.),  pp.  205-215. 

4.    The  Check  System. 

a.  When  a  bank  credit  takes  the  form  of  a  deposit  it  be- 
comes a  circulating  medium  through  the  check  system.     If  A 
who  draws  the  check  and  B  who  receives  it  have  accounts  in 
the  same  bank,  the  amount  of  the  check  is  charged  against  A' s 
account  and  credited  to  B's.     A's  original  debt  to  B  is  paid 
by  a  transfer  of  a  claim  upon  a  bank  without  the  use  of  money. 

b.  If  A  and  B  have  accounts  in  different  banks,  the  check 
drawn  by  A  upon  the  Farmers  Bank  is  credited  to  B   in   the 
Merchants  Bank  when  there  deposited  by  him.     The  check 
is  now  a  claim  of  the  Merchants  Bank  upon  the  Farmers  Bank. 
When  paid  directly  or  indirectly  by  this,  it  is  charged  against 
A's  account.     A's  debt  has  been  paid  by  book  entries  involv- 
ing transfers  of  claims1 

c.  The  clearing  house  is  an  institution  for  facilitating  ex- 
change and  settlement  of  checks.     One  is  found  in  every  city 
of  financial  importance.     To  the  clearing  house  each  bank 
sends  every  business  morning  all  the  checks  upon  other  banks 
in  the  city  received  by  it  the  previous  day  so  arranged  as  to 
be  distributed  quickly  to  banks  against  which  they  are  drawn. 
From  the  other  banks  each  bank  receives  all  the  checks  drawn 


90  Credit  and  Banking. 

against  it  and  deposited  in  them  the  previous  day.  The 
checks  brought  in  by  a  bank  represent  its  total  credit  or 
claim ;  those  received  by  it  at  the  clearing  house  represent 
its  debit  or  obligation.  The  difference  represents  its  debit 
balance  which  must  be  paid  in  money  during  the  day ;  or  its 
credit  balance  which  it  is  entitled  to  receive.  The  sum  of 
claims  against  the  clearing  house  equals  the  sum  of  its  obliga- 
tions ;  and  the  sum  of  credit  balances  must  equal  the  sum  of 
debit  balances.  The  clearing  house  not  only  saves  much  time, 
expense  and  danger,  but  it  greatly  decreases  the  amount  of 
actual  money  necessary  to  settle  balances.  In  smaller  cities 
clearing  house  balances  are  sometimes  settled  by  drafts  upon 
New  York. 

d.  Checks  drawn  upon  banks  in  smaller  cities  and  de- 
posited in  banks  in  other  cities  ("  country  checks  ")  are  paid 
by  a  more  or  less  round  about  system  of  transfer  from  bank 
to  bank.  They  are  frequently  finally  settled  either  by  off- 
setting obligations  or  by  drafts  on  a  financial  center. 

<?.  It  is  clear  that  by  the  mechanism  of  the  check  system 
deposits  based  upon  loans,  or,  in  brief,  credit,  are  a  most  im- 
portant medium  of  exchange,  increasing  and  decreasing  auto- 
matically with  changes  in  business,  but  always  dependent  upon 
the  existence  of  sufficient  legal  tender  reserve  to  insure  its 
prompt  liquidation. 

f.  At  certain  times  of  acute  financial  crisis,  when  banks, 
which  were  in  reality  sound,  were  not  possessed  of  sufficient 
reserve  to  pay  obligations  promptly,  clearing  houses  have 
issued  certificates,  in  return  for  securities  deposited.  Such 
certificates  were  used  by  the  banks  in  settling  clearing  house 
obligations,  setting  free  much  cash  reserve  for  the  urgent 
needs  of  the  community.  Even  the  mere  announcement  that 
the  clearing  house  would  issue  such  certificates  has  been  suffi- 
cient at  times  to  allay  panics. 


Credit  and  Banking.  91 

Dunbar,  Theory  and  History  of  Banking,  ch.  4;  Johnson, 
Money  and  Currency,  pp  46-51;  Seligman,  Principles  (3d  ed.), 
§  214;  Seager,  Introduction,  §  183;  Seager,  Economics,  §  132; 
White,  Money  and  Banking  (3rd  ed.),  pp.  216-231;  Hadley,  Econ- 
omics, pp.  232-238;  Scott,  Money  and  Banking,  pp.  218-226;  Can- 
non, Clearing  Houses. 

5.    Bank  Currency. 

a.  The  bank  note  is  a  promise  to  pay,  and,  as  has  been 
shown,  is  essentially  like  the  deposit,  since  it  is  credit  used  as 
a  means  of  payment.    Being  in  convenient  denominations  and 
often  resembling  government  paper  money,  it  circulates  freely 
as  money  among  all,  including  those  unable  to  judge  of  its 
safety  and  those  practically  unable  to  refuse  to  accept  it. 
Even  the  best  systems  of  redemption  do  not  insure  that  con- 
stant test  of  worth  which  is  found  in  the  case  of  the  check. 
For  these  reasons,  based  upon  long  experience,  some  protec- 
tion of  note  holders  as  distinguished  from  other  creditors  of 
a  bank  has  been  generally  deemed  advisable.     The  more  im- 
portant methods  are  the  following : 

b.  The  bank  note  is  frequently  made  a  prior  lien  upon  the 
assets  of  the  bank.    There  is  reason  to  believe  that  circulation 
secured  by  prior  lien  on  commercial  assets  will  be  entirely 
safe.     This  method  may  be  combined  with  others. 

c.  It  is  sometimes  protected  by  the  deposit  (by  the  issuing 
bank)  with  some  government  authority  of  collateral  security, 
such  as  government  bonds.     From  the  sale  of  such  securities 
in  case  of  the  inability  of  the  bank  to  meet  its  obligations  the 
noteholders  are  'reimbursed.     If  the  securities  accepted  are 
carefully  prescribed  and  if  overissue  is  prevented  by  require- 
ment that  the  notes  be  printed  or  stamped  by  the  government, 
absolute  safety  is  secured  by  this  method,  but  elasticity,  or 
quick  response  of  the  amount  of  notes  to  the  fluctuating  needs 
of  business,  is  absent. 

d.  The  Bank  of  England  notes  up  to  a  certain  amount  are 
protected  by  government  obligations  to  the  Bank.     Above 


92  Credit  and  Banking. 

that  they  are  protected  by  an  equivalent  amount  of  gold, 
becoming  thus  coin  certificates.  Absolutely  safe,  they  in  no 
way  add  elasticity  to  the  currency. 

e.  In  some  banking  systems,  notably  the  Canadian,  bank 
notes  have  been  protected  by  a  safety  or  guaranty  fund  col- 
lected from  all  the  banks  by  a  percentage  tax  and  used  to  pay 
the  notes  of  any  insolvent  bank.  The  fund  in  such  cases  is  re- 
imbursed entirely  or  in  part  from  the  assets  of  the  bank  accord- 
ing as  the  notes  are  or  are  not  a  prior  lien.  In  the  Canadian 
system  such  notes  are  limited  to  the  amount  of  a  bank's  capital, 
are  not  legal  tender,  are  promptly  redeemed  at  redemption  cen- 
ters through  the  country  and  bear  interest  from  the  time  of  a 
bank's  failure  to  redeem  until  they  are  paid.  These  provi- 
sions in  connection  with  its  branch  bank  features  make  the 
Canadian  bank-note  currency  absolutely  safe,  elastic  and  very 
sensitive  to  the  needs  of  different  parts  of  the  Dominion. 

/.  The  German  banks  are  like  the  Bank  of  England  in 
that  they  are  allowed  a  certain  amount  of  uncovered  circula- 
tion, namely,  385,000,000  m.  and  that  above  this  amount  all 
notes  must  be  protected  by  an  equivalent  amount  of  cash 
excepted  as  stated  below.  Unlike  the  Bank  of  England  the 
German  banks  may  issue  uncovered  notes  by  paying  a  tax  at 
the  rate  of  5$  per  annum  upon  the  notes  thus  issued.  Further 
the  cash  held  must  equal  one-third  of  the  circulation  and  the 
other  two-thirds  must  be  protected  by  short  term  business 
paper.  This  system  secures  a  specie  basis,  but  allows  an 
expansion  in  time  of  monetary  stringency. 

g.  Easy  redemption  will  do  much  to  prevent  excessive 
issues  and  ensure  safety.  It  is  absolutely  necessary  unless  notes 
are  protected  by  specie  or  bonds,  and  desirable  even  then. 

Dunbar,  Theory  and  History  of  Banking,  ch.  5 ;  chs.  8,  10,  11 
contain  explanations  of  the  French,  English  and  German  bank 
note  currency ;  Scott,  Money  and  Banking,,  pp.  166-176 ;  ch.  10 
describes  foreign  bank  systems  ;  Fetter,  Principles,  pp.  463-468  ; 


Credit  and  Banking.  93 

Seligman,  Principles,  (3rd  ed.),  §§  218,  219 ;  Johnson,  Money 
and  Currency,  pp.  331-339;  Hadley,  Economics,  §§  281-289; 
Nicholson,  Principles,  Bk.  III.,  ch.  19;  White,  Money  and 
Banking,,  (3rd  ed.),  Bk.  III.,  ch.  16,  contains  accounts  of  the 
foreign  bank  note  systems  ;  Bagehot,  Lombard  Street. 

Required  Reading  :  Bullock ,  Selected  Readings  in 
Economics,  ch.  16,  Laughlin,  Regulation  of  a 
Bank-Note  Currency. 

6.    General  Regulation  of  Banks. 

a.  Experience  shows  that  public  regulation  is  essential  to 
soundness.     Such  public  control  usually  insists  upon  publicity 
in  the  form  of  frequent  statements.     It  sometimes  provides  for 
governmental  inspection. 

b.  Specific  regulations  are  sometimes  made  as  to  allowable 
investments ;  amounts  that  may^be  loaned  to  one  person ;  the 
proportion  of  reserve;  the  paying  up  of  capital,  etc. 

Scott,  Money  and  Banking,  ch.  9. 
C.    DANGERS  OF  CREDIT. 

a.  Unwise  extension  of  credit  promotes  unwise  expenditure 
and  extravagance.     It  sometimes  encourages  unwise  govern- 
mental or  corporate  expenditures. 

b.  Unwisely  extended  in  business  it  promotes  speculation 
and  raises  prices  as  does  any  increase  of  the  medium  of  ex- 
change,    Such  rising  prices  encourage  further  speculation  and 
unwise  investments.     These  tendencies  may  continue  in  ever 
widening  circles  until  a  vast  volume  of  business  is  being  done 
upon  an  artificial  basis.      Sooner  or  later  confidence,  which 
is  the  basis  of  credit,  is  shaken,  prices  fall  rapidly,  speculative 
undertakings  and  even  sound  ones  fail,  panic  results  and  is 
often  followed  by  a  long  period  of  depression  before  confi- 
dence can  be  restored  and  credit  established. 

Hadley,  Economics,  §§  274-280,  333  ;  Walker,  Political  Economy, 
pp.  174-186;  Seligman,  Principles,  (3rd  ed.),  §  225;  Marshall, 
Economics  of  Industry,  Edition  of  1891,  pp.  151-153;  Jones,  Eco- 
nomic Crisis. 


CHAPTER  XI. 
AMERICAN  MONETARY  HISTORY. 

I.    Colonial  and  Revolutionary  Bills  of  Credit. 

a.  Bills  of  credit,  receivable  for  taxes  and  frequently  legal 
tender,  were  issued  by  the  American  colonies  to  provide  for 
war  expenses,  or  ordinary  expenses,  or  to  make  loans  to  pri  • 
vate  individuals.     In  spite  of  various  provisions  designed  to 
secure  redemption  and  to  prevent  depreciation,   they  were 
almost  invariably  issued  in  excess,   leading  to  depreciation, 
speculation,  loss  to  creditors  and  injury  to  business. 

b.  Despite  this  experience  and  the  warnings  of  prominent 
men,  the  Continental  Congress  issued  large  amounts  of  Con- 
tinental Currency  to  meet  war  expenditures.     This  money 
rapidly  depreciated  and  ultimately  became  worthless  in  spite 
of  laws  fixing  prices  and  forbidding  discrimination  against  it. 
The  results  were  the  usual  results  of  paper  issues. 

White,  Money  and  Banking  (3d  ed.),  Bk.  II.,  chs.  1,  2;  Bul- 
lock, Monetary  History  of  the  United  States,  pp.  29-78;  Dewey, 
Financial  History  of  the  United  States,  §§  9-11,  15-17;  Hepburn, 
Contest  for  Sound  Money,  pp.  53-60. 

2.    Establishment  of  Our  National  Monetary  System. 

a.  The  Federal  Constitution  provides  that  Congress  shall 
have  power  "  to  coin  money,  regulate  the  value  thereof,  and 
of  foreign   coin";  and  that  "no  State  shall   coin  money; 
emit  bills  of  credit ;  make  anything  but  gold  or  silver  coin  a 
tender  in  payment  of  debts." 

b.  At  the  beginning  of  the   national  government  many 
kinds  of  English,  Spanish  and  French  gold  and  silver  coins 
were  in  circulation.     In  different  parts  of  the  country  these 


American  Monetary  History.  95 

were  differently  valued  in  the  various  monies  of  account. 
Hamilton,  as  Secretary  of  the  Treasury,  made  a  report  to 
Congress  in  1791  on  the  coinage.  Although  preferring  a 
gold  unit  he  recommended  bimetallism  in  order  jiot  to  reduce 
the  money  in  circulation.  He  advised  the  adoption  of  the 
ratio  of  15:1,  that  being  the  market  ratio  at  the  time.  He 
recommended  that  the  weight  of  silver  (371^  grs.)  in  the 
Spanish  dollar,  then  widely  used,  be  made  the  unit,  and,  con- 
sequently, that  the  gold  dollar  contain  24^  grs. 

c.  The  act  of  1792  establishing  our  national  standard  fol- 
lowed   Hamilton's   recommendations.     It  provided  for  free 
coinage  of  gold  and  silver  at  the  ratio  of  15:1.     The  silver 
unit  was  a  dollar  of  371^  grs.  pure  silver  .and  the  gold  unit 
was  an  eagle  of  247.5  grs-  Pure  gold. 

d.  The  value  of  silver  declined  after  1792.    Consequently 
the  mint  ratio  undervalued  gold,   which  disappeared  when 
coined  and  soon  was  no  longer  brought  to  the  mint.    Although 
the  situation  was  much  obscured  by  the  circulation  of  foreign 
gold,  the  use  of  bank  notes  and  the  exportation  of  new  United 
States  coins,  the  standard  was  in  reality  a  silver  monometallic 
one.     Bimetallism  failed, 

Dewey,  Financial  History  of  the  United  States,  §§  27,  29,  30,  44; 
White,  Money  and  Banking,  pp.  31-34;  Johnson,  Money  and  Cur- 
rency, pp.  341-343;  Scott,  Money  and  Banking-,  pp.  329-332; 
L/aughlin,  History  of  Bimetallism  in  the  United  States,  ch.  2; 
Walker,  International  Bimetallism,  pp.  110-116;  Hepburn,  Con- 
test for  Sound  Money,  chs.  1,  2. 

3.    The  Change  to  Gold  Monometallism. 

a.  A  growing  demand  for  a  change  that  would  lead  to 
a  restoration  of  gold  to  our  circulation  resulted  in  the  law  of 
1834.  The  restoration  was  brought  about  by  changing  the 
ratio  to  16:  i.  This  was  accomplished  by  reducing  the  weight 
of  gold  in  the  dollar  to  23.2  grs.  In  1837  a  law  revising  the 
coinage  laws  raised  the  weight  of  gold  in  the  dollar  to  22.22 


96  American  Monetary  History. 

grs. ,  making  the  ratio  i5.98-j-:i,"  The  weight  and  ratio  of 
gold  and  silver  have  not  since  been  changed  in  standard  coins. 

b.  This  act  overvalued  gold,  the  market  ratio  at  the  time 
being  15.73:1.     Silver  disappeared  from  circulation,  even  the 
subsidiary  coins  being  withdrawn.     This  tendency  was  acceler- 
ated by  the  gold  discoveries  in  California. 

c.  The  lack  of  minor  coins  caused  such  inconvenience 
that  in  1853  a  law  was  passed  making  silver  coins  of  denomi- 
nations less  than  one  dollar  token  coins  with  legal  tender 
quality  limited  to  five  dollars.     The  weight  of  pure  silver  in 
one  dollar's  worth  of  these  coins,  face  value,  was  fixed  at 
345.6  grs. 

d.  The  result  of  these  laws  was,  while  nominally  retaining 
bimetallism,  to  establish  practically  the  gold  standard  with  an 
excellent  subsidiary  coinage  system.     No  further  change  in 
the  laws  governing  the  metallic  currency  was  made  until  1873. 

Dewey,  Financial  History  of  the  United  States,  §  90;  White, 
Money  and  Banking,  pp.  34-36 ;  Johnson,  Money  and  Currency, 
pp.  344-346 ;  Laughlin,  History  of  Bimetallism,  chs.  4,  5  ;  Hep- 
burn, Contest  for  Sound  Money ',  ch.  3. 

4.    The  Paper  Currency  of  the  Civil  War  Period. 

a.  The   enormous   and  sudden  increase   of  government 
expenditures  due  to  the  war  necessitated  the  use  of  every  pos- 
sible source  of  revenue.     The  expenditures  for  the  four  fiscal 
years  1858-1861  were  $272,826,000  ;  for  the  four  fiscal  years 
1862-1865  they  were  $3,348,400,000.     At  first  borrowing 
by  bonds  was  resorted  to,  and  then  gradually  increased  cus- 
toms and  internal  revenue  taxes  to  the  limit  of  endurance. 
The  increased  taxes  became  effective  only  slowly. 

b.  To  meet  pressing  needs  of  the  early  years  of  the  war 
Congress  authorized  the  issue  of  legal   tender   government 
notes  receivable  by  and  payable  to  the  government  except  for 
duties  on  imports  and  interest  on  the  public  debt.     Of  the 


American  Monetary  History.  97 

$450,000,000  authorized,  $431,000,000  were  outstanding 
June  30,  1864.  This  action  was  bitterly,  opposed  by  many  at 
the  time  and  there  is  much  reason  to  believe  that  more  vigor- 
ous and  far-sighted  use  of  the  taxing  power  at  the  beginning 
of  the  war,  supplemented  by  the  issue  of  bonds,  would  have 
furnished  sufficient  funds  without  resorting  to  paper  money. 

c.  Measured  in  gold  these  notes  showed  immediate  depre- 
ciation.    They  declined  steadily  to  62  in  February,  1863  ; 
then  rose  gradually  to  79  in  August,  1863  ;  then  fell  steadily 
and  rapidly  until  they  reached  39  in  July,  1864;  from  that 
time  until  the  end  of  the  war  they  rose  gradually,  standing  at 
74  in  May,   1865.     Somewhat  more  slowly,  prices  of  com- 
modities revealed  this  depreciation,   while  wages  rose  very 
tardily.     This  meant  a  heavy  burden  upon  the  people  already 
suffering  from  heavy  taxes.     The  rise  in  general  prices  cannot 
be  ascribed  entirely  to  inflation,  being  due  to  various  causes, 
including  the  heavy  taxes  on  domestic  and  foreign  productions 

d.  The  financial   difficulties  caused  by  the  war  and  the 
drain  upon  bank  and  government  reserves  caused  the  suspen- 
sion of  specie  payments,  Dec.  30,  1861.     With  the  issue  of 
the   ' '  greenbacks ' '    the  depreciation  of  paper  increased  so 
that  by  the  summer  of  1862  even  the  silver  subsidiary  coins 
of  lower  standard  were  driven  from  the  circulation  in  accord- 
ance with  Gresham's  law.     From  this  time  until  several  years 
after  the  war,  only  paper  was  used  in  ordinary  transactions. 

e.  The  deficiency  of  small  change  caused  great  inconven- 
ience.    Fractional  currency  and  copper  coins  were  issued  by 
cities  and  individuals.     Postage  stamps  were  largely  used  in 
small  trade.     In  July,  1862,  Congress  authorized  the  issue  of 
postage  currency  in  small  denominations.     In  March,  1863, 
Congress  authorized  the  issue  of  paper  fractional  currency 
receivable  in  payments  to  the  government  and  exchangeable 
for  legal  tenders.     These  remained  the  small  currency  of  the 
country  until  some  years  after  the  war. 


98  American  Monetary  History. 

f.  Although  not  in  circulation  gold  was  needed  by  the 
government  to  pay  interest  on  the  debt ;  by  importers  to  pay 
duties ;  and  for  trade  with  other  countries.     This  gold  was 
bought  with   paper   and   constantly  fluctuated  in   its   price 
according  to  actual  or  expected  changes  in  business,  financial, 
political  or  military  conditions.     An  exchange  for  dealing  in 
gold  was  opened  in  New  York  and  gold  became  a  favorite 
subject  of  speculation.     Because  of  the  alleged  evils  of  this 
speculation,  Congress  passed  a  bill  in  1864  forbidding  deal- 
ing in  gold  for  future  delivery.     Since  this  law  prevented 
legitimate  purchase  of  gold,  it  caused  a  sharp  rise  in  the  paper 
price  of  gold.     The  law  was  repealed  fifteen  days  after  its 
passage. 

g.  The   question   of  the   constitutionality   of    the   legal 
tenders  was  early  raised  and  the  early  decisions  of  the  Su- 
preme Court  were  unfavorable,  although  the  cases  brought 
involved  limited  questions  such  as  the  use  of  the  notes  to 
settle  contracts  entered  into  before  the  legal  tender  act  was 
passed.     In  one  of  these  cases,  however  (1869),  the  Court  by 
four  to  three  implied  that  the  legal  tender  clause  was  both  im- 
proper and  unnecessary.     In   1871   the  membership  of  the 
Court  having  changed,  it  was  decided  that  the  legal  tender 
notes  were  constitutional  as  a  war  measure.     In  1884  a  de- 
cision was  rendered  that  they  were  legitimate  even  when 
issued  in  time  of  peace.     This  decision,  which  itself  reveals 
the  influence  of  the  Civil  War  in  enlarging  federal  authority, 
was  bitterly  attacked  by  some  historians  and  constitutional 
lawyers.     All  in  all,  popular  opinion  agreed  with  the  Court 
and  there  is  no  further  question  of  the  power  of  the  Federal 
Government  to  issue  legal  tender  notes. 

h.  During  the  same  period  the  Confederate  States  were 
experiencing  to  the  utmost  the  evils  of  paper  currency.  Im- 
mense quantities  were  issued  by  the  Confederate  government, 
by  the  individual  states,  by  individuals  and  corporations 


American  Monetary  History.  99 

under  authority  received  from  the  States.     They  all  became 
practically  worthless  soon. 

Dewey,  Financial  History  of  the  United  States,  §§  116-125,  131, 
155,  156;  White,  .Money  and  Banking,  Bk.  JI.,  ch.  3;  Johnson, 
Money  and  Currency,  pp.  272-290 ;  Hepburn,  Contest  for  Sound 
Money,  chs.  8,  11. 

5.    Monetary  Reconstruction. 

a.  Various  views  as  to  the  best  policy  toward  United 
States  notes  prevailed  after  the  war,  from  the  extreme  attitude 
in  favor  of  immediate  resumption  of  specie  payments  to  that 
which  favored  an  increased  use  of  government  notes.     At  first 
(1866)  Congress  adopted  a  policy  of  gradual  contraction,  but 
the  panic  of  1873  revived  the  demand  for  more  paper  money. 
Congress  in  1874  passed  a  bill  for  the  permanent  increase  of 
the  paper  currency  from  $382,000,000,  at  which  it  then  stood, 
to  $400,000,000.     This  bill  authorizing  an  increase  of  paper 
in  time  of  peace  was  vetoed  by  President  Grant,  who  thus 
checked  the  inflationist  movement,  although  the  Greenback 
party  was  active  and  in  some  sections  powerful  from  1876  to 
1880. 

b.  In  January,  1875,  the  Resumption  Act  was  passed  pro- 
viding for  reduction  of  the  greenbacks  to  $300,000,000  ;  for 
the  substitution  of  silver  coin  for  the  fractional  currency  ;  and 
for  the  resumption  of  specie  payments  on  January  ist,  1879. 
A  fortnight  before  the  date  set  the  premium  on  gold  disap- 
peared and  on  January  ist,  1879,  specie  payments  were  re- 
sumed with  no  difficulty.    In  May,  1878,  Congress  prohibited 
the  further   permanent  retirement   of  greenbacks,   and    the 
amount  then  outstanding  ($346,681,000)  still  remains.   These 
notes   are   redeemable   in  gold,    but   are   reissued  when   so 
redeemed. 

Dewey,  Financial  History  of  the  United  States,  §§  143-147,  154- 
161;  White,  Money  and  Banking,  (3rd  ed.),  pp.  150-166;  Hep- 
burn, Contest  for  Sound  Money,  chs.  9,  10  ;  Noyes,  Thirty  ^ears 
(also  his  Forty  Years)  of  American  Finance. 


ioo  American  Monetary  History. 

6.    Silver  Legislation.     1873-1893. 

a.  In    1873   the   United  States  was   legally  a  bimetallic 
country,  but  silver  was  so  undervalued  that  it  was  not  coined, 
so  that  gold  was  the  standard.     In  fact,  paper  money,  some- 
what depreciated,  was  the  money  of  circulation  and  prices 
were  reckoned  in  it.     In  1873  a  law  for  the  revision  of  the 
coinage  was  enacted.      Incidentally  it  dropped  from  the  list 
of  coins  the  long  disused  silver  dollar.     The  law  was  later 
described  as  "  the  crime  of  1873." 

b.  The  decline  in  the  price  of  silver  beginning  at  this 
time  made  this  change  one  of  great  significance.     The  advo- 
cates of  enlarged  circulation,  defeated   in  their  attempts  to 
secure  paper  inflation,  now  vigorously  demanded  the  restora- 
tion of  silver  to  free  coinage.      A  bill  for  the  free  coinage  of 
silver  was  passed  by  the  House  in  November,  1877.     It  was 
amended  by  the  Senate  so  as  to  limit  the  amount  coined  and 
secure  the  profit  to  the  government.     In  this  form  it  became 
law  over  the  presidental  veto  in  1878. 

c.  The  provisions  of  this  law  of  1878  (sometime  called 
the  Bland,  or  the  Bland- Allison,  act)  were  that  the  govern- 
ment should  buy  each  month  not  less  than  two  nor  more  than 
four  million  dollars  worth  of  silver  bullion  at  the  market  price 
and  coin  it  into  dollars  containing  371.25  grs.  of  pure  silver  ; 
that  these  dollars  should  be  legal  tender ;  and  that  certificates 
of  deposit  in  denominations  of  not  less  than  ten  dollars  might 
be  issued  upon  the  deposit  of  such  coin  with  the  government, 
such  certificates  being  receivable  for  public  dues,    but   not 
legal  tender. 

d.  The  predicted  quick  transition  of  the  United  States  to 
a  cheap  silver  standard  did  not  take  place  because  the  amount 
of  silver  issued  was  so  limited  ;  and  the  rapid  development  of 
the  country  in  population,   wealth  and   commerce,  required 
more  money.     A  comparatively  small  amount  of  silver  dollars 


American  Monetary  History.  101 

circulated,  but  the  silver  certificates  were  kept  out,  especially 
after  the  passage  of  an  act  in  1886  providing  that  they  might 
be  issued  in  small  denominations. 

e.  The  agitation  for  free  coinage  continued.  Since  a 
presidential  veto  would  prevent  the  passage  of  a  free  coinage 
law,  the  Sherman  law  was  passed  in  1890  as  the  price  paid  by 
the  Republican  party  for  the  votes  of  a  few  silver  Senators 
necessary  to  the  passage  of  the  McKinley  high  tariff  bill.  In 
view  of  the  sharp  political  issue  joined  slightly  later,  it  is 
significant  that  this  bill  was  passed  by  a  Republican  Congress 
and  President. 

f.  This  Sherman  Law  of  1890  provided  that  the  govern- 
ment should  issue  legal  tender  notes  to  be  used  in  buying 
4,500,000  ozs.  of  silver  monthly  at  the  market  price.     With  a 
temporary  exception   only  so  much  silver  was  to  be  coined 
as  was  needed  for  the  redemption  of  these  Sherman  notes. 
Further,  they  might  be  redeemed  in  gold  or  silver  at  the  dis- 
cretion of  the  Treasury,  it  being  declared  the  policy  of  the 
United  States  to  keep  the  two  on  an  equality.     The  purchase 
provisions  of  the  law  of  1878  were  repealed,  but  silver  certifi- 
cates were  still  to  be  issued. 

g.  The  larger  amount  of  Treasury  notes  issued  under  this 
act  and  added  to  the  existing  legal  tenders   made  a  greater 
demand  on  the  gold  reserve.     Unfavorable  trade  conditions, 
large  expenditures  and  decreased  revenues  endangered  the 
maintenance  of  the  gold  standard.     There  resulted  an  acute 
panic  in  1893.     In  consequence  the  purchase  provisions  of 
the  act  of  1890  were  repealed  (1893). 

Dewey,  Financial  History  of  the  United  States,  §§  170-173,  186- 
189;  Seligman,  Principle*,  (3rd  ed.),  §204  ;  Taussig,  Silver  Situa- 
tion in  the  United  States,  Part  I.;  White,  Money  and  Banking, 
Bk.  II.,  ch.  6  ;  Johnson,  Money  and  Currency,  pp.  346-356  ;  L/augh- 
lin,  History  of  Bimetallism  in  the  United  States,  chs.  7,  13;  Hep- 
burn, Contest  for  Sound  Money,  chs.  12,  13,  17;  Noyes,  Thirty 
(or  Forty}  Years  of  American  Finance,  chs.  4-8. 


IO2  American  Monetary  History. 

7.    The  Great  Silver  Controversy. 
I.     GENERAL  CONSIDERATIONS. 

a.  The  panic  of  1893-4  was  a  serious  one.     Government 
revenues  decreased,  failures  were  numerous,  production  of  all 
kinds  decreased,  distress  and  unemployment  prevailed.    Prices, 
as  shown  by  index  numbers,  declined  steadily,  being  lower  in 
1896  than  at  any  other  time  during  the  Civil  War.     The  con- 
dition  of  the  agricultural  population,  especially  in  the  West, 
was  unfortunate.      Prices  of  all  sorts  of  agricultural  products 
were  very  low.     The  principal  and  interest  of  the  mortgages 
with  which  the  farms  had  been  bought  became  an  increasing 
burden. 

b.  The  prevailing  discontent  based  on  economic  condi- 
tions revealed  itself  politically.     In  the  South  and  West  the 
Populists  gained  preat  strength  as  did  a  radical  wing  within 
the   Democratic  party.     Within   the  Republican  party  a  mi- 
nority favored  free  coinage  of  silver,  while  many  others  were 
willing  to  make  concessions  to  the  silver  men  as  a  matter  of 
policy.     Only   in  the  East  was  there  a  positive  advocacy  of 
gold  monometallism. 

c.  In  the  campaign  of  1896   the   Democrats,   under  the 
leadership  of  W.  J.  Bryan,  advocated  free  coinage  of  silver. 
From  a  non-committal  attitude,    the   Republican    nominee, 
William  McKinley,  gradually  took  one  of  strong  advocacy  of 
what  was  called  "sound  money."      After  one  of  the  fiercest 
campaigns  in  the  country's  history  the  opponents  of  free  coin- 
age won. 

d.  Although  the  arguments  advanced  in  the  campaign  of 
1896  had  reference,  in  part,  to  a  particular  situation  they  in- 
volved such  a  comprehensive  consideration  of  general  monetary 
principles  in  an  actual  situation  that  a  resume  of   the  discus- 
sion seems  worth  while. 


American  Monetary  History.  103 

Dewey,  Financial  History  of  the  United  States,  §§  189-194; 
Noyes,  Thirty  (or  Forty}  Years  of  American  Finance,  chs.  9,  10; 
Hepburn,  Contest  for  Sound  Money,  pp.  373-391 ;  Johnson,  Money 
and  Currency,  pp.  356-360. 

II.    THE  ARGUMENT  FOR  AND  AGAINST  FREE 
COINAGE  IN  1896. 

a.  The  question  of  stability  in  the  standard  of  value. 

(1)  The  bimetallists  argued  that  their  policy  would  secure 
greater  stability  in  the  standard  of  value.     They  claimed 
that  under  monometallism  the  standard  of  value  is  sub- 
ject to  all  the  results  of  change  in  demand  or  supply  of 
the   chosen    metal,   while  under  bimetallism,  since  the 
two  metals  would  not  be  likely  to  change  in  the  same 
direction  simultaneously,   the  monetary  demand   would 
be  transferred  to  the  cheaper,   thus  preventing  as  great 
fluctuation  as  would  otherwise  take  place.     Further,  the 
very  size  of  the  money  base  would  prevent  fluctuations 
in  supply  having  the  same  effect  as  under  monometal- 
lism. 

(2)  The   monometallist,   on  the  other  hand,   contended 
that  the  fluctuations  in  the  standard  of  value,  although 
not  so  great  under  bimetallism,  would  be  more  frequent, 
since  they  would  be  caused  by  changes  in  the  supply  of 
either  metal.     They  further  contended  that,  while  the 
argument  of  the  bimetallist  might  be  sound  when  the 
legal  ratio  was   close  to  the  market  ratio,   it   had    no 
potency  in  the  particular  situation  under  consideration 
since  not  bimetallism  but  silver  monometallism  would 
be  the  result  of  the  policy  proposed. 

b.  The  question  of  a  "  par  of  exchange. ' ' 

(i)  The  bimetallist  urged  bimetallism  as  furnishing  a 
"par  of  exchange"  between  gold  and  silver  using  coun- 
tries. He  alleged  that  gold  using  countries  had  recently 


104  American  Monetary  History. 

suffered  because  of  the  absence  of  such  a  par  of  exchange, 
the  gold  value  of  their  exports  constantly  decreasing 
because  of  the  fall  in  the  value  of  the  silver  with  which 
they  were  paid  for.  Further,  such  a  par  of  exchange 
would  encourage  the  flow  of  capital  from  country  to 
country. 

(2)  The  gold  monometallists  denied  that  trade  is  "  so 
much  hampered  by  fluctuations  in  relative  money  values 
as  is  often  asserted."  Further  free  coinage  of  silver  by 
the  United  States  alone  would  mean  that  this  country 
would  be  silver  monometallic  and  thus  lack  a  par  of 
exchange  with  all  the  important  industrial  and  commer- 
cial nations. 

c.     The  argument  as  based  on  the  prices  of  commodities. 

(1)  The  silver  advocate  dwelt  particularly  upon  the  social 
and  industrial  evils  due  to  falling  prices.     Index  num- 
bers proved  the  fact  of  falling  prices.     Falling  prices  are 
disastrous   to    farmers,    to    merchants,    to    laborers,    to 
debtors — all  of  whom  are  the  active,    energetic  classes. 
Falling  prices  throughout  history  have  been  accompanied 
by  depression  and  disaster.     The  fall  in  prices  since  1873 
was  ascribed  to  the  demonetization  of  silver  and  the  con- 
sequent increased  demand  for  gold  to  do  so  much  more 
of  the  world's  monetary  work.      Although  there    had 
been  an  increase  in  the  production  of  silver,  it  was  not 
so  important  as  certain  previous  changes  in  the  relative 
production  of  gold  and  silver  had  been.     In  these  earlier 
cases  the  new  metal  had  under  bimetallism  been  absorbed 
without  great  effect  on  the  ratio,  and   so   it  would  have 
been  after  1873,  if  silver  had  not  been  demonetized. 

(2)  The  gold  advocate  ascribed  falling   prices  to   changes 
in  methods  of  production  and  transportation.     Further, 
prices  ought  to  fall  since  the  real  cost  of  production 


American  Monetary  History.  105 

measured  in  labor  has  fallen.  The  price  of  labor  meas- 
ured in  gold,  has  not  fallen,  and  this  is  the  fairest  test  of 
the  stability  of  value  of  money.  The  increase  in 
prices  which  would  follow  remonetization  of  silver 
would  work  great  injustice  to  the  thrifty  creditor  class, 
including  all  who  have  small  savings.  It  would  decrease 
the  real  value  of  all  fixed  incomes.  It  would  decrease 
the  real  incomes  of  laborers,  since  prices  would  rise 
more  rapidly  than  would  wages. 

(3)  The  silver  advocate  denied  that  changes  in  methods 
of  production  and  transportation  explained  the  fall  in 
prices,  since  equally  revolutionary  changes  in  methods 
of  production  between  1849  and  1873  were  accompanied 
by  rising  prices.  He  insisted  that  the  value  of  labor 
ought  to  increase,  since  the  results  of  progress  should 
accrue  to  the  producing  classes  and  not  to  those  having 
incomes  from  accumulated  wealth.  This  desirable  con- 
summation would  result  from  bimetallism. 

d.    -The  possibility  of  maintaining  a  bimetallic  standard  at 
i 6  to  i. 

(1)  The  extreme  gold  monometallist  contended  that  bi- 
metallism was  always  a  failure,  and  pointed  to  the  ex- 
perience  of  the   United   States,   of  France  and  of  the 
Latin  Union.     He  contended  that  a  great  flood  of  silver 
would  drive  all  gold  out   of  circulation  and  result  in 
metallic  inflation  and  depreciation. 

(2)  The  silver  advocate  contended  that  bimetallism  was  not 
impossible  even  for  the  United  States  alone,  since  the 
amount    of  free   silver   was  so  slight  that  it  could,  be 
absorbed  into  the  circulation  of  the  United  States  with- 
out displacing  all  the  gold.     Even  if  it  did,  this  would 
not  be  so  serious  a  result  as  the  continuance  of  the  exist- 
ing low  prices. 


io6  American  Monetary  History. 

(3)  The  international  bimetallist  agreed  with  the  advocate 
of  free  coinage  of  silver  as  to  the  evils  of  gold  mono- 
metallism.    He  contended  that  the  experience  of  the 
United  States  was  of  no  significance  as  to  the  possibility 
of  bimetallism  by  international  agreement.     Further,  he 
claimed  that  for  seventy  years  bimetallism  in  France  was 
not  only  successful,  but  rendered  the  world  a  great  ser- 
vice by  preventing  the  serious  effects  on  the  ratio  of 
value  which  would  otherwise  have  resulted  from  revo- 
lutionary changes  in    the    relative    production    of   the 
precious  metals.      Arguing  vigorously  for  the  possibility 
and  necessity  of  international  bimetallism,  he  agreed  with 

•  the  gold  monometallist  that  free  coinage  of  silver  by  the 
United  States  alone  would  result  in  silver  monometallism 
at  a  depreciated  standard  with  disastrous  consequences. 

(4)  The  contention   of  the   international    bimetallist    is 
that,  if  a  number  of  leading  nations  agree  to  coin  both 
metals  freely  at  a  common  ratio,  any  change  in  the  ratio 
of  value  will  cause  such  an  increased  demand  for  the 
cheaper  and  decreased  demand  for  the  dearer  that  the 
market  ratio  cannot  long  vary  from  the  legal  ratio. 

Johnson,  Money  and  Currency,  chs.  11,  12;  Hadley,  Economics, 
pp.  208-231 ;  Bullock,  Introduction,  §§  191-199 ;  Taussig,  Silver 
Situation  in  the  United  States,  Part  II.;  Walker,  International 
Bimetallism;  Political  Economy,  pp.  463-475;  Scott,  Money  and 
Banking,  chs.  14,  15;  Nicholson,  Principles,  Bk.  III.,  ch.  18; 
Money  and  Monetary  Problems,  pp.  246-311. 

8.    Establishment  of  the  Gold  Standard. 

In  1900  Congress  passed  a  law  which  provided  that  gold  is 
the  standard  of  value  and  making  it  the  duty  of  the  Secretary 
of  the  Treasury  to  maintain  all  other  monies  at  a  parity  with 
it ;  that  all  United  States  notes  shall  be  redeemed  in  gold  and 
that  a  reserve  fund  of  $150,000,000  shall  be  maintained  for 
this  purpose ;  that  the  Treasury  notes  of  1890  shall  be  retired 


American  Monetary  History.  107 

and  that  silver  certificates  shall  be  mainly  in  small  denomina- 
tions. 

Dewey,  Financial  History  of  the  United  States,  §  198 ;  Selig- 
man,  Principles,  (3rd  ed.),  §§  205,  206;  Johnson,  Money  and 
Currency,  pp.  360-363  ;  Hepburn,  Contest  for  Sound  Money,  ch.  18. 


CHAPTER  XII. 
AMERICAN  BANKING  HISTORY. 

I.    The  First  and  Second  United  States  Banks. 

The  first  Bank  of  the  United  States  was  chartered  by  the 
federal  government  in  1791  ;  and  the  second  Bank  of  the 
United  States  was  chartered  for  twenty  years  in  1816.  Neither 
of  these  banks  is  of  any  significance  from  the  standpoint  of 
monetary  principles,  but  they  had  great  importance  in  con- 
nection with  the  political  history  of  the  time.  They  rendered 
good  service  in  connection  with  the  general  finances  of  the 
government  and  the  country. 

Dewey,  Financial  History  of  the  United  States,  §§  43,  58,  67, 
68,  70,  71,  86-88 ;  on  pp.  97,  118,  143,  197  in  Dewey  will  be  found 
extensive  references  on  this  subject ;  White,  Money  and  Banking, 
Bk.  III.,  chs.  6,  7;  Hepburn,  Contest  for  Sound  Money,  pp.  62- 
73,  81-112. 

2.    State  Banking  Before  the  Civil  War. 

a.  Until  the  establishment  of  the  National  Banking  System 
during  the  Civil  War,   a  large  part  of  the  actual  monetary 
circulation  of  the  country  consisted  of  notes  issued  by  banks 
chartered  by  the  States.     The  laws  under  which  these  banks 
were  formed  varied  greatly.     In  some  states  there  were  almost 
no  restrictions  upon  the  formation  and  management  of  banks. 

b.  This  lack  of  uniformity  and  wise  regulation,   behind 
which  was  an  unintelligent  and  apathetic  public  opinion,  re- 
sulted in  all  sorts  of  banking  abuses.     Capital  was  frequently 
not  paid  up.     Note  issues  were  often  excessive  in  proportion 
to  capital,  were  not  protected  by  sufficient  reserve  or,  in  some 
cases,  by  any  at  all.     Note  redemption  was  practically  im- 
possible in  the  case  of  most  notes.     Counterfeiting  and  altering 


American  Banking  History.  109 

were  very  general.  The  notes  of  good  banks  were  quickly  re- 
turned for  redemption,  leaving  a  great  mass  of  more  or  less 
depreciated  circulation.  While  banks  and  business  men  were 
able  to  some  extent  to  protect  themselves  by  bank  note  ' '  De- 
tectors "  and  "Reporters,"  the  ordinary  individual  constantly 
suffered  loss. 

c.  These  evils  led,  especially  in  the  older  states,  to  various 
attempts  to  rectify  them.     The  Suffolk  Bank  of  Boston  brought 
New  England  bank  notes  up  to  par  by  becoming  a  kind  of 
clearing  house  for  the  redemption  of  notes.     This  system 
worked  successfully  from  1818  to  1865. 

d.  Another  attempt  at  improvement  was  the  New  York  State 
safety  fund  system  which  was  introduced  in  1829.     Although 
the  experience  was  not  satisfactory,  it  showed  that  this  method 
of  protecting  note  holders  would  succeed  if  issues  were  regis- 
tered to  prevent  over- issue  ;  if  notes  were  made  a  first  lien  on 
assets  ;  if  the  safety  fund  was  used  only  for  the  redemption  of 
circulating  notes ;  if,  as  soon  as  a  bank  failed,  its  notes  might 
be  presented  for  redemption. 

e.  Still  another  method  was  the  special  pledge  system  tried 
with  success  in  New  York  and  unsuccessfully  in  other  states. 
Experience  taught  that  this  system  would  be  successful  only 
if  the  best  public  bonds  were  accepted  as  securities  excluding 
mortgages  and  other  kinds  of  securities  ;  and  if  the  notes  were 
registered  to  prevent  over-issue. 

Seligman,  Principles,  (3rd  ed.),  §  220;  White,  Money  and 
Banking,  Bk.  III.,  chs.  9-12;  Dewey,  Financial  History  of  the 
United  States,  §§  66,  69  ;  Hepburn,  Contest  for  Sound  Money, 
pp.  89-93,  131-139. 

3.    The  United  States  National  Bank  System. 

a.  During  the  Civil  War  the  national  government  took 
charge  of  the  bank  circulation  of  the  country  by  chartering 
banks  which  could  issue  notes  secured  by  United  States  bonds. 
The  main  motive  was  to  find  a  market  for  these  bonds.  In 


no  American  Banking  History. 

1866   state  bank  notes  were  forced  from  circulation  by  a  ten 
per  cent.  tax. 

b.  The  Comptroller  of  the  Currency  has  general  charge 
of  the  United  States  banks,  having  authority  to  charter,  to 
examine,  to  require  statements  of  condition  and  in  other  ways 
to  exercise  general  supervision.     The  minimum  capital^  which 
must  be  paid  promptly  in  cash,  varies  according  to  the  size  of 
the  place.     The  powers  of  these  banks  are  limited  to  a  strict 
banking  business.     They  are  subject  to  various  restrictions 
designed  to  secure  safety. 

c.  The  reserve  must  consist  of  lawful  money.     In  certain 
cities  designated  as  reserve  cities  a  bank's  reserve  must  equal 
25%  of  its  deposits.     All  other  banks  must  keep  a  reserve 
of  15%,  of  which  three-fifths  may  be  deposited  in  banks  in 
reserve  cities.     A  reserve  city  bank  may  keep  one-half  of  its 
reserve  on  deposit   in   banks  in  certain  designated   central 
reserve  cities.     A  5$  fund  deposited  at  Washington  for  re- 
demption of  notes  may  be  counted  as  part  of  the  reserve. 
When  the  reserve  is  below  the  legal  limit,  loans  may  not  be 
extended  until  it  is  made  good. 

d.  A  bank  may  issue  notes  equal  to  the  par  value  of  bonds 
deposited  by  it  with  the  Comptroller  of  the   Currency,  but 
they  may  not  exceed  in  amount  the  market  value  of  the  bonds 
nor  the  capital  stock  paid  in.     Five  per  cent,  of  its  circulation 
must  be  kept  by  each  bank  on  deposit  with  the   Comptroller 
for   redemption   of  its  notes.     The   notes   are   legal  tender 
in  all  financial  relations  between  the  United  States  and  an 
individual  except  in  payment  of  interest  on  the  debt  of  the 
United  States  and  in  payment  of  import  duties.     They  are 
legal  tender  between  national  banks,  but  not  otherwise.     No 
notes  of  less  than  five  dollars  may  be  issued  and  only  one- 
third  of  a  bank's  circulation  may  be  in  that  denomination. 
The  banks  pay  a  small  tax  on  circulation.     Under  onerous 


American  Banking  History.  1 1 1 

conditions  "  emergency  circulation  "  may  be  issued  without 
bond  security. 

e.  The  defects  of  the  national  bank  system  are  mainly 
connected  with  its  circulation.  Although  absolutely  safe,  the 
bank  currency  is  not  elastic.  Many  propositions  for  a  change 
of  the  note  system  have  been  made. 

Dewey,  Financial  History  of  the  United  States,  §§  138,  139, 
163-165,  174,  200,  209;  Seligman,  Principles,  (3rd  ed.),  §221; 
White,  Money  and  Banking,  Bk.  III.,  chs.  14,  19;  Dunbar, 
Theory  and  History  of  Banking,  ch.  10  ;  Seager,  Introduction, 
§g  189,  190 ;  Seager,  Economics,  §$  137-139 ;  Bullock,  Introduc- 
tion, §  185  ;  Hepburn,  Contest  for  Sound  Money,  pp.  320-360. 


CHAPTER  XIII. 
INTERNATIONAL   EXCHANGE. 

a.  Most  international  payments  are  settled  by  the  use  of 
credit  instruments,  essentially  in  the  same  manner  in  which 
domestic  payments  are  made.     Such  bills  when  drawn  upon 
important  financial  centers,   and  pre-eminently  when  drawn 
upon  London,   may   by  endorsement  pass   from  country  to 
country  forming  an  international  currency. 

b.  Bills  of  exchange  are  commercial  or  documentary  if  drawn 
against  exports  of  merchandise  ;  financial  or  bankers'  if  drawn 
by  bankers.       They  are  "sight  "  if  payable  on  presentation  ; 
and  "  time,"  if  payable  a  certain  length  of  time  after  date. 
The  time  bill  will  be  lower  in  price  than  the  sight  bill  by  the 
interest  for  the  ensuing  period. 

c.  The  '  *  par  of  exchange  ' '  between  two  countries  is  the 
expression  of  the  value  of  the  standard  unit  coin  of  one  country 
in  terms  of  the  standard  unit  coin  of  the  other.     Since  the 
English  sovereign  contains  4.866-)-  as  much  gold  as  a  gold 
dollar,  the  par  of  exchange  between  England  and  the  United 
States  is  one  pound  sterling  =  $4. 866-|-.     Exchange  between 
two  countries  is  said  to  be  at  par  when  the  amount  of  specie 
given  for  a  bill  of  exchange  in  one  country  is  exactly  equal  to 
what  will  be  received  for  it  in  the  other. 

d.  Since  trade  conditions  are  constantly  changing,    ex- 
change is  rarely  at  par.     If  a  country's  obligations  are  greater 
than  its  claims,  the  demand  for  bills  of  exchange  (at  par)  will 
be  greater  than  the  supply  and  they  will  sell  at  that  premium 
which  will  cause  an  equilibrium.      If  its  obligations  are  less 


International  Exchange.  1 1 3 

than   its  claims,   then  correspondingly  bills  of  exchange  will 
be  at  a  discount. 

e.  The  limits  of  these  fluctuations  are  found  in  the  cost 
of  importing  or  exporting  specie.     The  premium  on  bills  of 
exchange  cannot  ordinarily  go  above  the  cost  of  exporting 
specie  nor  below  the  cost  of  importing  it.     These  limits  are 
called  the  "  gold  points."     In  time  of  great  monetary  strin- 
gency such  normal  limits  may  be  passed. 

f.  A  country's  balance  of  credit  or  debit  (upon  which  the 
price  of  foreign  exchange  depends)  cannot  be  ascertained  by 
examining  solely  exports  and  imports  of  commodities.    There 
must  also  be  taken  into  account  securities  bought  and  sold, 
expenses  of  travellers,   ocean  freights,  interest  on  obligations 
of  one  country  held   in  others,   commissions  and  any  other 
items  affecting  balance  of  liability. 

g.  Business  is  done  largely  upon  credit ;    credit  depends 
largely  upon  specie  reserve;  specie  reserve  is  affected  by  gold 
imports  or  exports ;  such  movements  of  specie  depend  upon 
the  price  of  foreign  exchange.     The  rate  of  foreign  exchange, 
then,    has   great   significance   to   merchants,    manufacturers, 
bankers  and  speculators. 

Seligman,  Principles,  (3rd  ed.),  §  228;  Sealer,  Introduction, 
$%  205-209;  Seager,  Economics,  |§  140-144";  Bullock,  Introduc- 
tion, pp.  268-272  ;  339-344  ;  Fetter,  Principles,  pp.  485-488  ;  John- 
son, Money  and  Currency,  pp.  85-102;  Andrews,  Institutes,  |§  95, 
96;  Nicholson,  Principles,  Bk.  III.,  ch.  26;  Hadley,  Economics, 
pp  238-241;  Scott,  Money  and  Banking ,  ch.  12  ;  Mill,  Principles, 
Bk.  III.,  ch.  20. 


CHAPTER  XIV. 

ECONOMIC  NATURE  AND  FUNCTION  OF 
SPECULATION. 

a.  Speculation  is  the  buying  or  selling  of  commodities  in 
the  expectation  that  subsequent  selling  or  buying  of  the  same 
will  yield  a  profit  other  than  that  which  would  be  considered 
a  reward  for  wholesale  or  retail  handling.     In  one  form  or 
another  it  is  a  prominent  fact  in  present  economic  life.     To 
it  are  attributed  many  evils  such  as  that  it  is  purely  gambling  ; 
that    it    causes    artificial   prices  and  corners  ;  that  it   injures 
producers  and  investors ;  and  that  the  gains  of  speculators  are 
mere  extortion. 

b.  Gambling  is  economically  disadvantageous.     This  is 
not  because  the  utility  of  the  gain  in  case  of  success  is  less 
than  that  of  the  possible  loss,  as  President  Hadley  says,  for 
this  is  not  true  if  the  odds  are  favorable ;  but  because  gambling 
discourages  industry  and  social  productiveness. 

c.  Insurance,  on  the  other  hand,  encourages  industry  and 
promotes  social  welfare. 

d.  Nearly  all  modern  business  involves  speculation,  since, 
while  goods  are  in  process  of  production  or  sale,  changes  in 
price  may  result  in  great   gain   or  loss.     The   manufacturer, 
the  wholesale  or  retail  merchant,  the  builder,  the  farmer,  are 
speculators  whether  they  will  or  not. 

e.  To  some  extent  these  risks  may  be  avoided  by  con- 
tracts for  future  delivery.     At  the  inception  of  the  work   the 
builder  or  the  manufacturer  may  contract  for  future  delivery 


Economic  Nature  and  Function  of  Speculation.  1 1 5 

of  labor  or  material.  The  manufacturer  may  contract  to  sell 
his  goods  and  to  buy  his  materials  so  as  to  avoid  many  un- 
certainties. Such  arrangements,  however,  do  not  do  away 
with  speculation,  but  transfer  it  to  a  class  who  specialize  as 
speculators. 

/.  Such  a  class  to  succeed  must  be  skilled  forecasters  of 
future  demand  and  supply.  If  they  estimate  that  a  certain 
commodity  will  in  the  future  be  lower  in  price  than  now,  all 
things  considered,  they  sell  for  future  delivery,  confident  that 
they  will  buy  for  even  less.  If  they  believe  the  price  will  be 
higher  they  buy  for  future  delivery,  confident  that  the  future 
price  will  yield  a  profit.  In  each  case  their  action  tends  to 
secure  a  greater  uniformity  of  price  over  a  period  than  would 
otherwise  be  found.  There  results  a  survival  of  a  class  of 
skillful  speculators  who  estimate  the  course  of  prices  with 
great  accuracy. 

£.  The  motive  of  such  speculators  is  to  make  a  personal 
gain,  and  the  method  is  practically  a  wager.  But  there  results 
a  great  social  advantage.  By  the  action  of  speculators  supply 
tends  to  be  equalized  in  time  and  space  so  that  prices  tend  to 
be  steadier.  This  results  in  securing  the  greatest  possible 
social  utility  from  such  supply. 

h.  There  seems  to  be  no  easy  method  of  distinguishing 
between  good  and  bad  speculation.  Both  use  the  same  com- 
modities and  the  same  methods.  Both  use  largely  borrowed 
money.  False  reports,  corners,  manipulation  and  anything 
which  tends  to  fix  prices  artificially  rather  than  to  ascertain 
what  they  naturally  tend  to  be,  interferes  with  the  equaliza- 
tion of  supply  over  a  given  time,  and  consequently  to  result 
in  an  economic  loss  to  the  community.  Further,  the  ease 
with  which  the  business  of  speculation  may  be  taken  up  entices 
many  who  overestimate  their  capacity  in  this  direction.  That 
this  results  in  economic  loss  is  true,  but  speculation  is,  in  this 


1 1 6  Economic  Nature  and  Function  of  Speculation. 

respect,  different  from  other  businesses  only  in  degree. 
Further,  such  mistaken  speculators  are  rapidly  eliminated  from 
business. 

/.  It  seems  clear  that  reason  and  experience  are  against 
attempts  to  regulate  speculation  by  prohibiting  the  sale  of 
commodities  for  future  delivery. 

Hadley,  Economics,  chap.  4 ;  Seligman,  Principles,  pp.  359- 
366,  369 ;  Seager,  Introduction,  pp.  174-177  ;  Seager,  Economics, 
§66;  Fetter,  Principles,  chap.  36;  Emery,  Speculation  on  the 
Stock  and  Produce  Exchanges  of  the  United  States. 

Required  Reading :  Bullock,  Selected  Readings  in 
Economics,  pp.  340-353,  367-386  :  Selections  from 
Emery's  Speculation. 


CHAPTER  XV. 
PROTECTION  AND  FREE  TRADE. 

I.    Definition  and  Discrimination. 

a.  Protection    means    "the    policy   of  encouraging  and 
developing  home  industries  by  means  either  of  bounties  paid 
to  home  producers  or  of  duties  imposed  upon  goods  imported 
from  abroad." 

b.  Free  trade  means  trade  carried  on  in  such  way  that  no 
protection  is  afforded  the  home  producer.     Duties  on  com- 
modities not  produced  in  the  country  are  consistent  with  free 
trade.     So  are  duties  upon  foreign  commodities  which  are 
also  produced  in  the  country,   if  they  are  accompanied  by 
equivalent  excises. 

c.  A  tariff  levied  mainly  for  revenue  may  give  incidental 
protection.     A  protective  tariff  may  produce  great  revenue. 

d.  An  increase  of  the  rate  of  the  protective  duty  may 
lower  revenue  by  greatly  decreasing  importations. 

<?.  The  taxation  of  foreign  goods  which  cannot  be  pro- 
duced at  home  encourages  home  industries  theoretically,  since 
to  some  extent  it  results  in  substitution  in  consumption  of 
similar  home-produced  articles. 

Bullock,  Introduction,  §§  238,  239. 
2.    History  of  Governmental  Relations  to  Foreign  Trade. 

a.  Under  Mercantilism  (i5th,  i6th  and  iyth  centuries) 
governments  restricted  and  aided  trade  by  many  methods  and 
in  nearly  all  lines.  Import  and  export  duties,  bounties,  navi- 
gation laws,  prohibition  were  all  used  to  develop  a  nation's 


n8  Protection  and  Free  Trade. 

trade  and  manufactures.     This  was  largely,  however,  under 
the  influence  of  the  balance  of  trade  theory. 

b.  The  general  movement  for  freedom  in  the  eighteenth 
century  included  a  demand  for  greater  freedom  of  interna- 
tional trade.     Adam  Smith  vigorously  attacked  the  Mercan- 
tilist system,  set  forth  the  advantages  of  free  trade  and  became 
the  recognized  spokesman  of  this  policy.    His  influence  was  far- 
reaching,  not  only  upon  economists,  but  also  upon  statesmen. 

c.  Although  William  Pitt,  the  younger,  revealed  the  influ- 
ence of  Adam  Smith,  the  first  actual  progress  in  England 
toward  free  trade  was  accomplished  by   Huskisson  between 
1823  and  1828.     In  1837  the  famous  anti-corn  law  agitation 
began,  and,   under  the  leadership  of  Richard  Cobden  and 
John  Bright,  continued  until  the  repeal  of  the   Corn  laws  in 
1846.     The  free  trade  policy  was  gradually  extended  until  in 
1869  the  present  absolutely  non-protective  system  was  intro" 
duced.     In  the  last  few  years  a  movement  for  protection  has 
gained  ground.      Mr.  Balfour,  assenting  to  the  superiority  of 
free  trade  in  general,  doubted  its  wisdom  for  England  in  the 
midst  of  a  protectionist  world,  and  favored  protection  as  a 
retaliatory  measure  and  as  a  basis  of  reciprocity.     Mr.  Cham- 
berlain, further,  favored  protection  with  reciprocal  discrim- 
inating tariff  agreements  with  the  colonies  in  order  to  strengthen 
the   Empire.      But  in  the  election  of  1906  England  declared 
emphatically  for  continuation  of  free  trade,  although  the  drift 
of  by-elections  has  seemed  to  indicate  growth  of  protectionist 
sentiment  since  then. 

d.  The  tariff  policy  of  the  United  States. 

(1)  The  first  national  revenue  system  included  a  tariff  law 
which,   mainly  designed  to  secure  revenue,  was  moder- 
ately protective.       Such  was  our   national   policy    for 
some  years. 

(2)  From  1807  to  1815  the  Embargo,  the  Non-intercourse 


Protection  and  Free  Trade.  119 

Act  and  war  cut  off  foreign  commerce,  turned  the  de- 
mand for  certain  products  toward  the  home  producer 
and  acted  as  extreme  protection.  When  these  condi- 
tions passed  away  the  protected  home  producer,  suddenly 
exposed  to  the  full  force  of  foreign  competition,  secured 
in  1816  the  first  distinctly  protective  tariff. 

(3)  Laws  passed  in  1832  and  1833  provided  for  reduction 
and  then   a  gradual  decrease  of  duties.     Although     in- 
creased duties  were  imposed  in   1842,   the  act  of  1846 
again  provided  for  low  rates.     So  satisfactory  were  the 
results  of  low  tariff  that  in  1857  a  further  reduction  was 
made. 

(4)  For  revenue  reasons  high  duties  were  imposed  during 
the    Civil    War.     Incidentally,    these    duties    involved 
heavy  protection.     Industries  that  thus  came  to  be  de- 
pendent on  protection  were  unwilling  to  dispense  with 
it,  when  after  the  War  the  urgent  need  of  revenues  there- 
from had  passed  away.     The  political  weakness  of  the 
South  (where  low  tariff  views  had    prevailed)  and  the 
growing    political    strength    of  the    industrial    regions 
favored  a  continuation  of  the  high  war  tariff. 

(5)  At  times  agitation  for  revision  of  the  tariff  was  active, 
but   the   changes    made   were    insignificant.      President 
Cleveland's   famous    tariff   message    in   1887  made  the 
tariff  again  a  live  political  issue,  but  a  Republican  Senate 
prevented  change.     On  the  contrary,  a  Republican  vic- 
tory in  the  elections  contested  over  this  question,  led  to 
the  passage  of  the  very  highly  protective  McKinley  act 
in  1890. 

(6)  The   popular    discontent   with   this  act  soon  placed 
the  Democrats  in  full  control,  and  in  1894  the  Wilson- 
Gorman    act    was    passed    and  became  law  without  the 
President's  signature.     This  measure  (a  compromise  and 
badly  devised)  was  highly  protective  and  did  not  fairly 


I2O  Protection  and  Free  Trade. 

represent  the  policy  of  tariff-reduction.     Unsatisfactory 
to  nearly  all,  it  was  short  lived. 

(7)  In  1897  the  Dingley  act  introduced  the  most  highly 
protective  system  the  country  had  known.  There  was 
even  among  protectionists  some  reaction  against  extreme 
protection.  Mr.  Elaine  and  President  McKinley  declared 
for  reciprocity.  Because  of  local  industrial  conditions 
or  because  of  antipathy  to  the  protected  trusts,  the  re- 
visionist tendency,  especially  in  the  middle  West,  be- 
came quite  marked.  Revision  played  some  part  in  the 
campaign  of  1908.  Because  of  the  popular  feeling  shown 
in  this  campaign  and  because  of  promises  made  to  revise 
the  tariff  downward,  an  act  was  passed  in  1909.  Except 
for  placing  hides  on  the  free  list,  this  law  gave  no  indi- 
cation of  a  relaxation  in  the  high  protective  system. 
Certain  nominal  reductions  left  the  duties  still  prohibi- 
tive; the  average  rate  of  duty  was  slightly  higher  than 
ever;  and  the  rates  upon  important  necessaries  like  wool- 
len goods,  cottons,  hosiery,  etc.,  were  left  as  under  the 
Dingley  act  or  actually  raised. 

e.  The  general  expectation  in  the  middle  of  the  nine- 
teenth century  that  the  contemporary  tendency  toward  free 
trade  would  continue,  was  mistaken.  France,  Germany, 
Italy,  and,  in  fact,  practically  all  countries  maintain  high 
protection. 

Seligman,  Principles,  (3rd  ed.)  §  229;  Dewey,  Financial  His- 
tory of  the  United  States,  §§35,  36,  73,  78-84,  102,  107,  113,  114, 
119,  127,  128,  167,  180,  181,  187,  192,  196:  Gide,  Principles,  pp. 
310-318;  Palgrave,  Dictionary  of  Political  Economy,  vol.  II.,  p. 
148,  article  Free  Trade,  Modern  History  of;  The  Americana  ar- 
ticle on  Free  Trade. 

Required  Reading:  Bullock,  Selected  Readings 
in  Economics,  pp.  155-164.  Census  Report  on  the 
Advantages  of  the  United  States  for  Manufacturing 
Industries. 


Protection  and  Free  Trade.  121 

3.    Some  General  Controversial  Considerations. 

a.  There  is  much  fallacious  argument  on  both  sides  based 
on  alleged  results.     Post  ergo  propter.     Countries  have  pros- 
pered   under  each   system.      The    United    States   was   very 
flourishing  under  low  tariff  from  1846  to    1861,  and  under 
high  tariff  from  1897  to   1907.     Panics  occurred  under  low 
tariff  in    1847   and    1857,   and  under  high  tariff  in   1873, 
1884-6,  and  1907. 

b.  Many  forces  affect  a  country's  prosperity — natural  re- 
sources,  human  efficiency,   education,  wars,   forms  of  social 
organization.      It   is,    then,   difficult  to   trace  the   exact  in- 
fluence of  free  trade  or  protection.     The  results  of  each  are 
undoubtedly  often  much  exaggerated. 

c.  The  free  trader  in  asserting,  as  he   sometimes  does, 
that  the  government  cannot  tax  one  for  the  benefit  of  another, 
misrepresents  the  protectionist  attitude,  for  protection  claims 
that  it  benefits  all.     The  free  trader,  frequently,  also  demands 
a  more  extreme  application  of  laissez  faire  than  is  in  har- 
mony with  modern  thought  and  practice  as  to  the  relation  of 
government  to  industry. 

d.  On  the  other  hand,  the  actual  establishment  of  a  new 
industry  by  protection  does  not  necessarily  justify  it.     Almost 
any  industry  might  be  established  in  almost  any  country  by 
protection ;  but  it  might  be  at  too  great  cost. 

e.  We  cannot    settle  this  controversy  by  regarding   the 
consumer  alone  as  does  the  free  trader  often  ;  nor  by  regard- 
ing the  effect  on  a  few  producers  as  does  the  protectionist. 

For  references  see  end  of  the  chapter. 

4.    The  Argument  for  Protection. 

a.  The  "balance  of  trade  "  argument  emphasizes  the  de- 
sirability of  securing  a  large  share  of  the  precious  metals  by 
discouraging  imports  and  encouraging  exports  of  commo- 


122  Protection  and  Free  Trade. 

dities.  A  favorable  balance  of  trade  will  result  in  an  import 
of  money,  and  thus  a  nation  will  get  wealthy.  Intelligent 
protectionists  no  longer  use"  this  argument. 

b.  For  a  long  period  the  * '  home  market ' '  argument  was 
influential  in  the  United  States.     It  was  "  thought  to  reconcile 
the  interests  of  the  agricultural  South  and  West  with  those  of 
the   manufacturing   North.      It   rests  upon    the   proposition 
that  the  prosperity  of  the  American  farmer  depends  upon  a 
regular  and  constant  market  for  his  products,  and  that  such 
a  market  is  to  be  obtained  only  by  building  up  manufacturing 
centers  within  the  country."     (Seager.) 

c.  The  "  infant  industry  "  argument  asserts  that  a  country 
well  fitted   in  natural  resources  and  in  the  character  of  its 
people  to  carry  on  a  certain  industry,  may  not  be  able  to 
establish  it  without  protection  because  of  the  competition  of 
other  nations  in  which  the  industry  has  long  been  carried  on. 
A  temporary  burden  upon  the  consumer  is  justified  because 
of  the   later    results.     Competition  within  the  country  will 
eventually  reduce  prices. 

Friedrich  List,  a  German  Economist  (ipth  century), 
asserted  that  the  industrial  development  of  a  country  includes 
five  stages;  hunting  and  fishing,  pastoral  life,  agriculture, 
manufacture  for  home  supply,  manufacture  for  export.  In 
the  case  of  some  nations  this  evolution  is  checked  in  the 
transit  from  the  agricultural  stage  by  competition  of  nations 
that  have  progressed  further.  Hence,  said  List,  temporary 
protection  is  necessary  to  enable  a  country  to  pass  from  the 
agricultural  to  the  manufacturing  stage. 

d.  The  "wages  argument  "  for  protection  has  taken  two 
phases  in  the  United  States.     Early  in  our  history,  protection 
was  said  to  be  necessary  to  overcome  the  disadvantage  of  the 
American  manufacturer  due  to  the  high  wages  he  must  pay. 
Later  it  was  asserted  that  wages  had  become  high  because  of 


Protection  and  Free  Trade.  123 

protection.  Now  the  two  are  advanced  together;  wages  are 
high  because  of  protection  and  we  must  continue  protection 
in  order  to  overcome  the  industrial  disadvantage  of  high  cost 
due  to  high  wages. 

e.  The  advantages  of  "diversified  industries"  have  re- 
cently been  emphasized.  A  well-rounded  economic  develop- 
ment with  different  kinds  of  occupations  is  necessary  to 
social  progress.  Without  protection  a  country  may  be  one- 
sided in  its  development  with  an  undue  tendency  toward 
agriculture  or  manufacturing,  resulting  possibly  in  early 
exhaustion  of  some  kinds  of  natural  resources.  Diversified 
industries,  says  the  protectionist,  securing  "a  more  efficient 
utilization  of  labor  and  capital  and  a  help  to  enterprise,  will 
result  in  higher  wages  as  well  as  greater  profits,  a  better 
standard  of  life  for  the  workman  and  a  more  prosperous  condi- 
tion for  the  manufacturer." 

/.  It  is  sometimes  said  that  by  protection  a  country  may 
make  foreigners  pay  its  taxes.  The  imposition  of  the 
protective  duty  will  compel  the  foreign  manufacturer  to 
reduce  his  price  in  order  to  retain  his  market  in  the  taxing 
country.  With  slight  or  even  no  increase  in  price  to  the 
domestic  consumer,  the  government  gets  its  revenues  at  the 
expense  of  the  foreigner. 

g.     In  order  to  be  independent   of  other  nations  in  time 
of  war  a  country  should  establish  by   protection  those  indus- 
tries producing  necessities  of  existence  and  war  materials. 
For  references  see  end  of  the  chapter. 

Required  Reading:  Bullock,  Selected  Readings  in 
Economics,  pp.  472-4.89  ;  Lisf  s  Arguments  for  Pro- 
tection. 

5.    The  Argument  for  Free  Trade. 

a.  Against  the  "balance  of  trade"  argument  it  is  said 
that  wealth  does  not  consist  of  money  only;  that  an  excessive 


124  Protection  and  Free  Trade. 

stock  of  money,  if  it  could  be  secured  in  this  way,  would  so 
affect  prices  as  to  stimulate  imports  and  discourage  exports  ; 
that  imports  must  in  the  long  run  pay  for  exports;  and  that 
international  movements  of  money  depend  not  upon  relation 
of  exports  of  commodities  to  imports  of  commodities,  but  of 
total  credits  to  total  liabilities. 

b.  Against  the   "home  market"   argument  it  is  claimed 
that  the  home  market  is  no  steadier  than  the  foreign  ;  that 
the  development  of  transportation  has  decreased  the  cost  of 
moving  goods;  and  that  the  need  of  the  United  States  at 
present  is  foreign  markets. 

c.  The  ' 'infant  industry"  argument  is  held  to  have  little 
weight  now,  since  we  are  able  to  compete  with  the  world  in 
nearly  every  line  of  manufacture  and  have  passed  from  an 
agricultural  economy.     Further,  it  is  said,   that    "infant  in- 
dustries" never  are  willing  to  dispense  with  that  aid  which 
was  designed  to  be  temporary  ;  that  while  admittedly  pro- 
tection should  be  granted  only  to  those  industries  which  are 
quite  sure  to  succeed  ultimately,  this  aid  is  applied  generally 
and  without  discrimination  ;  and  that  the  protection  of  agri- 
cultural industries  is  not  consistent  with  this  theory.     More- 
over, as  evidence  that  industries  can  and  do  develope  with- 
out  protection,   emphasis   is  placed  on  the  development  of 
manufactures  in  the  newer  parts  of  the  United  States,  in  spite 
of  the  competition  of  the  older  manufacturing  regions  within 
the  country. 

d.  The  free  trader  asserts  that  wages  are  fixed  by  produc- 
tivity and  little  dependent  upon  the  tariff.     He  calls  attention 
to  the  fact  that  wages  in  the  United  States,  because  of  the  high 
level  of  productivity,  have  always  been  high  in  unprotected  as 
well  as  in  protected  industries  and  that  protected  laborers  are 
few  as  compared  with  the  unprotected.     High  wages  do  not 
necessarily  mean  high  cost,  but  frequently  low  cost.     Com- 
parative costs  rather  than  comparative  wages  determine  ability 


Protection  and  Free  Trade.  125 

of  manufacturers  to  compete  with  those  of  other  nations. 
While  the  withdrawal  of  protection  might  destroy  certain 
industries,  the  level  of  general  wages  would  not  fall  after 
readjustment  had  taken  place.  Wages  are  low  in  Russia  and 
Germany,  although  these  countries  are  strongly  protectionist. 
Further  the  free  trader  asserts  that  protection,  by  interfering 
with  the  most  natural  and  efficient  production,  actually  tends 
to  make  wages  lower  than  they  would  otherwise  be. 

<?.  The  free  trader,  while  not  denying  that  diversification 
of  industries  is  desirable,  contends  that  it  may  be  secured  at 
too  great  cost ;  that  much  diversification  is  inevitable  in  every 
country;  that  in  the  United  States  we  cannot  fail  to  have 
great  diversification  because  of  the  variety  of  climate  and 
resources ;  and  that  infinite  wisdom  and  foresight  are  neces- 
sary to  secure  a  proper  diversification  artificially.  Natural 
development  is  safer. 

f.  To  make  the  foreigner  pay  our  taxes  is  unethical ;  and 
is  possible  only  in  a  few  cases.     Moreover  the  foreigner  can, 
if  this  argument  be  sound,  make  us  pay  his  taxes. 

g.  The  military  argument  may  have  some  weight  for  other 
countries,  but  little  for  the  United  States,  because  we  produce 
nearly  all  necessaries. 

h.  More  positively,  the  free  trader  asserts  that  freedom  of 
international  trade,  like  freedom  of  internal  trade,  increases 
production  of  wealth  by  bringing  about  the  ' '  most  efficient 
utilization  of  economic  forces."  "The  freer  the  conditions 
of  exchange  the  more  highly  will  the  division  of  labor  be 
developed.  Difference  in  the  productive  capacities  of  dif- 
ferent countries  fit  some  to  produce  some  things,  others, 
others.  If  free  trade  is  permitted  ...  .the  conse- 
quence will  be  a  larger  joint  produce  and  a  larger  share  of 
wealth  for  each  country."  (Seager.) 

t.  Protection,  if  effective,  increases  prices,  burdens  the 
consumer  and  is  class  legislation. 


126  Protection  and  Free  Trade. 

j.  By  increasing  the  cost  of  raw  material  protection  in- 
jures many  manufacturing  industries.  This  argument  has 
been  advanced  vigorously  in  some  parts  of  the  United  States 
recently.  Our  export  trade  is  injured  by  taxing  raw  materials. 

k.     Protection  leads  to  the  exhaustion  of  raw  materials. 
/.     Protection  involves  business  uncertainty. 

m.  Protection  leads  to  political  corruption,  undue  in- 
fluence from  protected  interests  on  political  parties  and  legis- 
lation, and  log-rolling.  Campaign  funds  are  supplied  by  pro- 
tected parties. 

n.  While  theoretically  there  is  much  to  be  said  for  pro- 
tection (especially  in  connection  with  nascent  industries)  if 
designed  by  a  judicious,  disinterested  and  exceedingly  wise 
authority,  actual  conditions  and  practical  experience  condemn 
it. 

For  references  see  end  of  the  chapter. 

Required  Readings:  Bullock,  Selected  Readings 
in  Economics,  pp.  489-512;  Bastiaf  s  Criticism  of 
Protection. 

6.    Conclusion. 

a.  With  much  strength  and  much  weakness  'in  the  argu- 
ment on  each  side  it  is  not  strange  that  both  popular  and 
expert  opinion  should  be  divided.     Each  must  form  his  own 
conclusions. 

b.  However,  the  one  who  accepts  the  conclusions  of  the 
free  trader  must  remember  that,  in  the   United  States,   our 
whole  industrial  and  commercial  system  is   adjusted  to  pro- 
tection.    Progress  toward  free  trade,  if  it  be  desirable,  must 
be  gradual,  discriminating  and  mindful  of  actual   conditions. 

c.  On  the  other  hand  the  protectionist  should  remember 
that  there  is  little  argumentative  support  for  continuous  and 


Protection  and  Free  Trade.  127 

universal  protection.     Hence  no  particular  tariff  is  permanent 
and  sacred.     Changing  conditions  require  frequent  revision. 

Seligman,  Principles,  (3rd  ed.)  §§  230-232;  Seager,  Economics, 
ch.  17;  Seager,  Introduction,  §§  210-216;  and  his  article  on  Pro- 
tection in  International  Encyclopedia;  Bullock,  Introduction,  pp. 
355-373;  Hadley,  Economics,  §§  466-488;  Fetter,  Principles,  ch. 
51;  Gide,  Principles,  pp.  318-346;  Andrews,  Institutes,  §§  56-60; 
Mill,  Principles,  Bk.  V.,  ch.  x.,  §1;  Ely,  Outlines,  (1908),  ch. 
18;  Smart,  7#e  Return  to  Protection,  chs.  1-12. 


CHAPTER  XVI. 

COMBINATION ;  MONOPOLIES. 
I.    Definition. 

"Monopoly  means.... such  control  over  the  supply  of  an 
economic  good  as  enables  the  monopolist  to  regulate  its  price." 
(Seager.)  Monopoly  should  be  discriminated  from  scarcity, 
from  differential  advantage,  from  large  business  enterprise. 
Since  modern  industrial  and  social  conditions  tend  to  increase 
the  extent  of  monopolistic  control  and  to  decrease  the  regu- 
lative and  protective  action  of  competition,  this  question  be- 
comes one  of  increasing  significance. 

Seager.,  Introduction,  §§  109,  246;  Seager,  Economics,  §§  74, 
183;  Fetter,  Principles,  p.  304;  Ely,  Outlines,  (1908),  pp.  187- 
192;  Bullock,  Introduction,  §  200;  Palgrave,  Dictionary  of  Politi- 
cal Economy,  articles  on  Monopolies;  L/e  Rossignol,  Monopolies 
Past  and  Present,  ch.  1;  Ely,  Monopolies  and  Trusts,  ch.  1. 

2.    Classes  of  Monopolies. 

a.  Personal  monopolies  due  to  unusual  personal  talent  or 
knowledge. 

b.  Legal  monopolies  created  by  law  which  may  be 

1)  Private  if  granted  to  private  persons. 

2)  Public  if  reserved  as  a  governmental  privilege. 

c.  Natural  monopolies  where  certain  conditions  seem  quite 
inevitably  to  produce  monoply.     Such  may  be 

1)  Monopolies  of  location  due  to  the  limited  supply  of 
some  natural  agent  or  opportunity,    as  in  the  case  of 
mineral   springs,    the   anthracite  coal  supply   of  the 
United  States,  street  railways  in   certain   streets,    rail- 
roads in  mountain  passes. 

2)  Monopolies  of  organization  in  industries  of  increasing 


Combination;   Monopolies.  129 

returns,  as  gas,  water,  electric  lighting  companies; 
railroads.  In  these  fixed  capital  and  supplementary 
costs  are  influential. 

3)    Capitalistic  monopolies  or  ' l  trusts' '  due  to  the  advan- 
tage of  controlling  a  larger  capital  than  that  of  other 
producers  in  the  same  industry. 
d.     One  business  may  represent  several  classes  of  monoply. 

Bullock,  Introduction,  §§  202-205;  Seager,  Introduction,  §  110; 
Seager,  Economics,  §  75;  Fetter,  Principles,  pp.  305-308;  Ely, 
Outlines,  (1908)  pp.  192-197  ;  Seligman,  Principles,  pp.  152,  153; 
Ely,  Monopolies  and  Trusts,  ch.  2. 

3.    Personal  and  Legal  Monopolies. 

a.  Personal  monopolies  are  relatively  insignificant ;  main- 
ly in  lines  of  service  that  are  not  absolutely  necessary ;  are 
subject   to   the   competition  of  somewhat    lower   grades   of 
ability ;  and  consequently  need  no  special  regulation  or  con- 
sideration. 

b.  Private  monopolies  of  the  older  sort  are  no   longer 
granted.     Patents  and  copyrights  are  granted  in  order,  first, 
to  secure   compensation  to  inventors  and  writers  for   their 
intellectual  labor ;  and,  secondly,  to  encourage  the  investment 
of  capital  in  making  the  invention  or  book  available  to  the 
public.     While  in  individual  cases  social  injury  rather  than 
benefit  results,  and  while  not  only  are  particular  patent  and 
copyright  laws  open  to  serious  criticism  but  even  the  funda- 
mental ideas  of  such  systems  are  somewhat  criticised,  still  they 
are  generally  accepted  as  the  most  practicable  methods  of  re- 
warding these  classes  of  producers. 

c.  Public  legal  monopolies  are  of  great  importance,  but 
for  sociological  or  fiscal  rather  than  purely  economic  reasons. 

Seager,  Introduction,  §§248-250;  Economics,  §§  184-186 ;  Ely, 
Outlines,  (1908),  pp.  194,  463-465  ;  Hadley,  Economics,  §§  148, 
149;  Palgrave,  Dictionary  of  Political  Economy,  article  on 
Patents  ;  L,e  Rossignol,  Monopolies,  ch.  5. 


130  Combination;   Monopolies. 

4.    General  Considerations  regarding  Natural  Monopolies. 

a.  The  tendency  toward  the  formation   of  combinations, 
possessed  of  more  or  less  monopolistic  powers,  is  natural  and 
inevitable. 

b.  Monopoly  value  tends  to  be  fixed  at  that  point  which 
gives  greatest  net  returns  (Chapter  6,  §  7).     Hence  there  will 
tend  to  result  frequently,  prices  high  as  compared  to  normal 
values;  bad  quality  quite  beyond  the  consumer's  power  to  re- 
dress; a  resulting  interference  with  normal  and  just  distribu- 
tion; the  accumulation  of  great  fortunes  which  are  out  of  pro- 
portion to  the  services  rendered  society;  social  injury  because 
of  the  discouragement  to  the  consumption  of  certain  monopo- 
lized articles  of  great  utility. 

c.  The  power  of  a  monopoly  to  control  prices  is,   how- 
ever, subject  to  certain  restrictions  without  conscious  social 
effort.     The  consumer  may  refrain  from  consuming  the  article 
in  some  cases  with  no  great  injury  to  himself  and  even  with 
a  positive  economic  gain;  or  he  may  substitute  some  other 
article  for   the   monopolized  one.     Further  if  a  monopoly 
pushes  its  advantage  too  far,  competition  may  arise. 

d.  These  possibilities  of  injury  and  of  natural  remedy 
vary  in  different  lines  of  consumption.     In  the  case  of  neces- 
saries, especially  if  a  naturally  limited  supply  is  controlled, 
the  consumer  is  at  the  mercy  of  the  monopoly;  while  in  the 
case  of  luxuries  no  serious  results  are  likely.     But  even  if  a 
monopoly  does  not  use  its  power  to  the  utmost,  these  evils 
may  be  present  in    greater  or  less  degree.     To  take  a  dime 
unfairly  where  a  dollar  might  have  been  extorted  involves  a 
relatively  small  injury,  but  social  injustice  and  danger  are 
present. 

e.  Moreover   the    nominal   returns    to    the   owners  of  a 
monopoly  are  not  a  sure  indication  of  the  profits  really  made 
by  prices  above  normal  value.     High  salaries,    large  profits 


Combination;   Monopolies.  131 

made  by  subsidiary  companies,  overcapitalization  may   con- 
ceal the  fact  of  undue  gains. 

f.  For  these  reasons  many  lines  of  public  policy  have  been 
suggested  to  prevent  the  actual  or  possible  evils.  These  may 
be  grouped  under  the  heads  of  Reestablishment  of  Competi- 
tion ;  Public  Ownership ;  Public  Regulation. 

Seligman,  Principles,  §§  149,  157 ;  Seager,  Introduction,  §§  111, 
114  115;  Economics,  §§  76,  78;  Palgrave,  Dictionary  of 
Political  Economy,  article  on  Monopolies ;  Jenks,  The  Trust 
Problem,  chs.  2,  10  ;  Ely,  Monopolies  and  Trusts,  pp.  217-240. 

5.    Reestablishment  of  Competition. 

The  numerous  recent  attempts  to  reestablish  competition 
by  prohibiting  combination  or  concerted  action  have  been 
almost  without  exception  failures.  Even  if  the  nominal 
object  of  the  law  is  attained,  combination  is  continued  in 
some  other  method.  "  Where  combination  is  possible,  com- 
petition is  impossible."  In  many  cases  monopoly  is  desir- 
able as  a  matter  of  public  interest.  Competing  waterworks, 
gas  companies,  telephone  companies,  railroads,  mean  public 
inconvenience,  a  waste  of  capital,  and  in  the  long  run  higher 
cost  to  the  consumer.  As  Professor  Ely  says,  "  We  must 
have  monopolies  in  these  cases  and  the  only  question  we  are 
concerned  with  is,  'What  kind  of  monoplies  shall  we 
have?'  " 

Jenks,  The  Trust  Problem,  pp.  217-221  ;  212,  213. 
6.    Public  Ownership. 

The  immediate  answer  of  many  to  the  question  in  the  last 
section  is  Public  Monopolies.  Better  service;  lower  prices  or 
larger  public  revenues;  prevention  of  great  private  fortunes; 
destruction  of  the  corrupt  political  control  gained  by  corpor- 
ations; end  of  discriminations  that  mean  the  success  or  failure 
of  private  business;  relief  of  the  producer  or  shipper  of  raw 
materials  from  disastrous  oppression,  are  some  of  the  alleged 
benefits  that  would  flow  from  public  ownership.  In  actual 


132  Combination;   Monopolies. 

experience  varying  results  show  themselves,  so  that  while 
these  benefits  may  be  realized  and  in  some  cases  actually  have 
been,  there  is  sufficient  conflicting  evidence  to  make  public 
ownership  at  least  questionable.  Service  under  Public  Owner- 
ship is  declared  inferior;  lower  prices,  if  given,  may  be  at  the 
expense  of  the  tax  payer  and  not  because  of  efficient  manage- 
ment; these  public  undertakings  become  political  spoils  and 
corruption  develops.  The  importance  of  the  service;  the 
size  of  the  force  of  workers  employed;  the  nature  of  the 
technical  problems  to  be  dealt  with;  the  amount  of  capital 
involved;  the  civic  development  and  general  character  of  the 
community  concerned;  the  administrative  capacity  of  the 
government  are  factors  influencing  the  decision.  The  water 
supply  tends  fortunately  toward  public  ownership;  but,  in  the 
opinion  of  most  impartial  students  of  the  question,  public 
ownership  of  the  railways  would  be  disastrous  in  the  United 
States  even  though  it  is  successful  in  other  countries;  and 
public  ownership  of  the  great  capitalistic  monopolies  is  ad- 
vocated only  by  the  socialist.  Between  these  extremes  are 
gas  and  electric  lighting,  telephones,  the  telegraph,  express 
and  municipal  transit,  in  all  of  which  the  wisdom  or  unwis- 
dom of  private  ownership  is  fairly  debatable. 

Seager,  Introduction,  §§253-257,264;  Economics,  §§189-192, 
202,  203;  Seligman,  Principles,  §§  222-224;  Bullock,  Introduction, 
§212;  Fetter,  Principles,  ch.  53;  Ely,  Outlines,  (1908),  pp. 
507-512 ;  480,  481 ;  Hadley,  Economics,  §§  436-449;  I^e  Rossignol, 
Monopolies,  pp.  131-142,  180-183,  251. 

7.    Public  Regulation. 

Since  the  evils  of  uncontrolled  monopoly  are  certain,  since 
competition  cannot  be  forcibly  restored,  and  since  public 
ownership  has  not  been  approved  in  the  United  States 
and  in  some  other  countries,  private  ownership  has  been 
subjected  to  public  regulation.  This  solution  of  the  mono- 
poly question  which  is  the  actual  American  method  and  now 
in  process  of  rapid  development,  takes  innumerable  forms  of 


Combination;   Monopolies.  133 

which  only  a  few  can  be  mentioned.  The  quality  of  the 
service  or  commodity  may  be  prescribed ;  the  price  fixed ; 
discrimination  between  different  consumers  forbidden ;  the 
length  of  the  franchise  limited ;  the  capitalization  regulated ; 
taxes  imposed  upon  earnings  to  secure  some  of  the  monopoly 
profits  for  the  community.  Some  form  or  other  of  public 
service  commission  is  the  instrument  by  which  the  community 
exercises  this  regulation.  Essential  to  success  is  the  power 
to  investigate  and  to  enforce  publicity. 

Fetter,  Principles,  chs.  55,  56 ;  Seager,  Introduction,  §  257, 
chs.  24,  25  ;  Economics,  §  193,  chs.  21,  22 ;  Seligman,  §  214;  Ely, 
Outlines  (1908),  pp.  481-483. 

8.    Conclusion. 

The  growing  extent  of  monopolies,  the  resulting  serious- 
ness of  the  problem,  the  differences  in  the  conditions  affect- 
ing the  different  sorts  of  monopolies,  the  complexity  of  the 
political,  legal,  sociological,  fiscal,  technical  and  economic 
factors  involved,  make  this  subject  too  difficult  to  be  more 
than  outlined  in  a  general  course.  Only  after  careful  special 
study  of  this  subject  can  one  rightly  form  a  judgment. 


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